Question #7
Reading: Reading 40 Analysis of Active Portfolio Management
PDF File: Reading 40 Analysis of Active Portfolio Management.pdf
Page: 3
Status: Incorrect
Correct Answer: B
Your Answer: A
Question
Which of the following statements is least accurate?
Answer Choices:
A. Sharpe ratio of a portfolio consisting of a combination of benchmark and actively managed portfolio with positive active return will be higher than the Sharpe ratio of the benchmark
B. The information ratio of a constrained active portfolio is unaffected by aggressiveness of the active weights
C. Unlike Sharpe ratio, information ratio is affected due to addition of cash or leverage
Explanation
Information ratio of an unconstrained active portfolio is unaffected by aggressiveness of
the active weights. Sharpe ratio is unaffected by addition of cash or leverage but
information ratio would be. A portfolio consisting of a combination of benchmark and an
actively managed portfolio is calculated as:
SRP
2 = SRB
2 + IR2
If the active return is positive, IR>0 and SRP>SRB.