Question #21
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
Charles Griffith makes quarterly bets between stocks of industrial and utility sectors. Griffith's strategy has an annualized active risk of 18%. Based on the information below, If Griffith wants to limit his active risk to 6%, what is the allocation to Utility sector when Griffith is bullish about Industrial stocks? Benchmark Sector Weight Industrial 80% Utility 20%
Answer Choices:
A. 5%
B. -13%
C. 14%
Explanation
If active risk is limited to 6%, the deviation from the benchmark weights of 80% and 20% is
limited to 6%/18% or 33%. Hence when Griffith is bullish about industrials, the weight to
that sector will be 80% + 33% or 113% and the weight to utility sector will be 20% - 33% or
-13%.
(Module 40.4, LOS 40.e)
IR = ( TC ) IC √BR = ( 0.90 ) ( 0.07 ) √49 = 0.441