Question #30
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
Question
Which of the following is correct for a constrained active portfolio?
Answer Choices:
A. TC<1
B. TC>1
C. TC=1 Sundar Mithai, CFA, is a fund manager for Pearl Investments and makes a monthly report to the firm's partners. Mithai mentions two active managers in his report, Galab and Phasar. Exhibit 1 provides additional information on the two managers: Exhibit 1: Selected Information on Galab and Phasar Galab Phasar Information coefficient 0.22 0.37 Transfer coefficient 0.8 0.73 Active risk 5.6% 6.6%
Explanation
When we impose constraints on portfolios, the actual active weights (Δwi) will differ from
optimal active weights (Δwi*) and TC<1.
(Module 40.3, LOS 40.c)
Sundar Mithai, CFA, is a fund manager for Pearl Investments and makes a monthly report to
the firm's partners. Mithai mentions two active managers in his report, Galab and Phasar.
Exhibit 1 provides additional information on the two managers:
Exhibit 1: Selected Information on Galab and Phasar
Galab Phasar
Information coefficient
0.22
0.37
Transfer coefficient
0.8
0.73
Active risk
5.6%
6.6%
Active return
10.8%
9.2%
Mithai makes the following comments regarding the two active managers:
Comment
1:
The investment mandate of Phasar appears to be less constrained relative to
Galab.
Comment
2:
Galab appears to have better skill at predicting returns.
Mithai recently decided to give all the analysts at the firm a refresher on the fundamental
law of active portfolio management. Details of a hypothetical unconstrained fund is shown
in Exhibit 2.
Exhibit 2: Hypothetical Fund
Information coefficient 0.14
Monthly active bets
5
Active risk
4.32%