Question #29 - 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: 13

Status: Incorrect

Correct Answer: A

Your Answer: B

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 most likely to be a closet index fund is:

Answer Choices:

A. Saltire

B. Dragon

C. Rose

Explanation

A closet index fund is a fund, which is presented as being actively managed but covertly tracks the underlying benchmark index. It will achieve little active return and be exposed to little active risk, will have a low information ratio, and will have a Sharpe ratio close to the Sharpe ratio of the underlying benchmark. The Sharpe ratio is calculated as excess return over the risk-free asset per unit of portfolio risk: (RP – RF) / σP. Sharpe ratios for each fund's benchmark are calculated below (RB – RF) / σB: Saltire: (5.80% – 2%) / (4.50%) = 0.84 Dragon: (11.56% – 2%) / (5.15%) = 1.86 Rose: (11.37% – 2%) / (11.14%) = 0.84 The Rose fund has the lowest information ratio of the three funds, and its Sharpe ratio (0.85) is very close to that of its benchmark (0.84). It is therefore most likely to be a closet index fund.

Actions

Practice Flashcards