Question #23
Reading: Reading 40 Analysis of Active Portfolio Management
PDF File: Reading 40 Analysis of Active Portfolio Management.pdf
Page: 10
Status: Correct
Correct Answer: A
Question
Jon Gamlin is comparing a market timing strategy with a stock selection strategy. He draws the following two conclusions for unconstrained active managers: Conclusion 1 To achieve the same information ratio, a market timer making weekly forecasts on the movement of the market needs to have a higher skill level than a stock selector following 25 stocks and updating the forecast semi-annually Conclusion 2 A specialist following only 4 stocks who revises his forecast 100 times per year will achieve the same information ratio as a stock selector with the same skill level who follows 50 stocks and updates his assessments semi-annually Regarding Gamlin's conclusions:
Answer Choices:
A. Only conclusion 2 is correct
B. Neither conclusion is correct
C. Only conclusion 1 is correct
Explanation
In conclusion 1, the market timer has a breadth of 52 and the stock selector 50. In order to
achieve the same information ratio, the stock selector would need to make up for the
lower breadth with a higher information coefficient.
In conclusion 2, the specialist has a breadth of 400 and the selector 100. If they have the
same skill level, the specialist with the larger breadth will have a higher information ratio