Question #28 - Reading 40 Analysis of Active Portfolio Management

Reading: Reading 40 Analysis of Active Portfolio Management

PDF File: Reading 40 Analysis of Active Portfolio Management.pdf

Page: 12

Status: Correct

Correct Answer: A

Shared Context

- The largest positive contribution to the active return achieved by the Ranger fund is expected to come from: A) security selection. B) asset allocation. C) Cannot tell from the information available.

Question

Of the three funds described in Exhibit 2, the fund with the highest information ratio is:

Answer Choices:

A. Saltire

B. Dragon

Explanation

The information ratio measures the active return (RP – RB) per unit of active risk (tracking error). The information ratio for each fund is calculated as follows: Saltire: (8.46% – 5.80%) / 1.58% = 1.68 Dragon: (13.01 – 11.56%) / 2.12% = 0.68 Rose: (11.39% – 11.37%) / 0.21% = 0.10

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