Question #20
Reading: Reading 40 Analysis of Active Portfolio Management
PDF File: Reading 40 Analysis of Active Portfolio Management.pdf
Page: 9
Status: Correct
Correct Answer: A
Question
An active manager has an information coefficient of 0.07, transfer coefficient of 0.90, and makes 49 independent bets per year. Benchmark portfolio has a Sharpe ratio of 0.40 and standard deviation of benchmark returns is 12%. The optimal amount of active risk is closest to:
Answer Choices:
A. 6%
B. 8%
C. 14%
Explanation
For a constrained portfolio, the optimal level of residual risk can be computed as:
σ*A =(IR / SBB)σB = (0.441 / 0.40)(0.12) = 13.23%