Question #2
Reading: Reading 40 Analysis of Active Portfolio Management
PDF File: Reading 40 Analysis of Active Portfolio Management.pdf
Page: 1
Status: Incorrect
Correct Answer: A
Your Answer: B
Question
Alisa Darent is evaluating several active portfolio managers with the same style and benchmark portfolio. Manager Active return Active risk Alfred 3.00% 12.00% Brad 2.20% 11.00% Charles 2.00% 10.50% Benchmark return is expected to be 11%. What will be the maximum expected return for Darent's portfolio assuming that she wants to limit her active risk to 11%?
Answer Choices:
A. 2.20%
B. 2.75%
C. 13.75%
Explanation
Darent will select the manager with the highest information ratio – or Alfred.
IR (Alfred) = 3/12 = 0.25
IR(Brad) = 2.2/11 = 0.20
IR(Charles) = 2.0/10.50 = 0.19
Expected active return = E(RA) = IR x σA =0.25 x 11 = 2.75%.
Expected return = E(RB) + E(RA) = 11% + 2.75% = 13.75%