Question #11

of 40 Zeta fund has active return and active risk of 1.6% and 8% respectively. Benchmark portfolio has a Sharpe ratio of 0.35 and standard deviation of benchmark returns is 10.5%. What is the level of active risk that an investor would need to take to maximize the Sharpe ratio of a portfolio consisting of Zeta fund and the benchmark portfolio? A) 8% B) 7% C) 6% Radina Radichkova, CFA, is considering investing in one of three actively managed funds whose benchmark is the FTSE 100. The Sharpe ratio and standard deviation of the benchmark are 0.50 and 15%, respectively. Alpha Bankso Crystal Active return 3.2% 2.8% 12.5% Active risk 4.1% 3.6% 15.5% Radichkova is also analyzing an actively managed portfolio consisting of financials and pharmaceuticals. The following table shows the weights and returns of the benchmark and portfolio: Sector WB WP RB RP Financials 50% 70% 9.2% 17.8% Pharmaceuticals 50% 30% 8.1% 6.3% Radichkova makes the following comments about the two-sector portfolio: Comment 1: The value added is 5.7%. Comment 2: The asset allocation decision only accounts for 0.22% of the value added. Radichkova is writing a summary of the fundamental law of active management. In that section of the report, she states that the transfer coefficient can be viewed as the correlation between: 1. ex-ante active returns and actual active weights 2. risk-weighted optimal active weights and risk-weighted actual active weights 3. ex-ante active returns and realized active returns