Question #34
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
Shared Context
Question
If the hypothetical fund described in Exhibit 2 was subject to investment constraints, its expected active return would be expected to:
Answer Choices:
A. rise
B. fall
C. remain unchanged
Explanation
If an actively managed portfolio is not subject to investment constraints, its transfer co-
efficient will be equal to 1, reflecting the manager's ability to achieve optimal active weight
in the portfolio. If constraints are imposed, the transfer co-efficient will be between 0 and
1. Given active return is positively related to the transfer co-efficient, the imposition of
constraints must lead to a reduction in expected active return.