Question #13
Reading: Reading 40 Analysis of Active Portfolio Management
PDF File: Reading 40 Analysis of Active Portfolio Management.pdf
Page: 6
Status: Correct
Correct Answer: A
Part of Context Group: Q13-14
First in Group
Shared Context
Question
How many of Radichkova's comments are correct in relation to the two-sector portfolio?
Answer Choices:
A. One
B. Both
C. None
Explanation
σA =
σB
IR
SRB
σA =
0.15 = 0.242
0.806
0.5
Both comments are correct.
The return of the portfolio is 70% × 17.8 + 30% × 6.3% = 14.35%.
The return of the benchmark is 50% × 9.2% + 50% × 8.1% = 8.65%.
Value added = 14.35 – 8.65 = 5.7%.
Return from asset allocation is (70% – 50%) × 9.2% + (30% – 50%) × 8.1% = 0.22% (i.e.,
active weights times benchmark returns).
This implies that return from stock selection is 5.7 – 0.22 = 5.48%.
Let us check that:
70% × (17.8% – 9.2%) + 30% × (6.3% – 8.1%) = 5.48% (i.e., portfolio weights times active
returns).