Question #33
Reading: Reading 40 Analysis of Active Portfolio Management
PDF File: Reading 40 Analysis of Active Portfolio Management.pdf
Page: 15
Status: Correct
Correct Answer: A
Part of Context Group: Q33-34
First in Group
Shared Context
Question
The expected active return generated by the hypothetical fund described in Exhibit 2 is:
Answer Choices:
A. 3.12%
B. 4.68%
C. 8.20%
Explanation
The expected level of active return achieved by a portfolio is calculated as follows:
E(RA) = TC(IC) √(BR) σA
where:
TC = transfer co-efficient
IC = information co-efficient
BR = number of independent active bets taken per year
σA = active risk
In an unconstrained portfolio, the transfer co-efficient is equal to 1. Therefore the active
return generated by the fund will be:
E(RA) = 1 × 0.14 × √60 × 4.32% = 4.68%