Question #1
Reading: Reading 40 Analysis of Active Portfolio Management
PDF File: Reading 40 Analysis of Active Portfolio Management.pdf
Page: 1
Status: Incorrect
Correct Answer: C
Your Answer: B
Question
Which of the following statements is least accurate?
Answer Choices:
A. The Sharpe ratio of a portfolio is unaffected by addition of cash or leverage in the portfolio
B. Investors can take active risk that is suitable for them by investing in a combination of actively managed portfolio and benchmark portfolio
C. A closet index fund has a low Sharpe ratio
Explanation
A closet index fund will have Sharpe ratio close to the benchmark's Sharpe ratio. The
Sharpe ratio is for a portfolio is indeed unaffected by addition of cash or leverage to the
portfolio. However, information ratio does change as we add cash or leverage to the
actively managed portfolio. Investors can combine benchmark portfolio and active
portfolio to obtain optimal level of active risk for them.