Question #36
Reading: Reading 40 Analysis of Active Portfolio Management
PDF File: Reading 40 Analysis of Active Portfolio Management.pdf
Page: 16
Status: Incorrect
Correct Answer: B
Your Answer: A
Question
Tom Grenkin is a market timer with an information ratio of 0.75. He makes a prediction of the movement in the market each quarter. Jane Fortina is a stock selector who follows 50 companies and revises her assessment each quarter. She also has an information ratio of 0.75. Assuming both managers have unconstrained portfolios, which of the following statements regarding the two managers is most accurate?
Answer Choices:
A. As both managers have the same information ratio, they must also have the same information coefficient
B. As Fortina’s strategy has a much larger breadth, she must have a larger information coefficient than Grenkin
C. As Grenkin makes fewer bets per year, he requires a higher information coefficient on each bet than Fortina to achieve the same information ratio
Explanation
IR = (TC) IC√BR = (0.75) (0.05) √36 = 0.225
(IR) = IC ×
As a stock selector, Fortina makes many more bets per period and has a much larger
breadth. She therefore requires a lower information coefficient than Grenkin to achieve
the same information ratio. Grenkin requires a higher coefficient.
Grenkin 0.75 = IC × 4½
IC = 0.75/2
= 0.375
Fontina 0.75 = IC × 200½
IC = 0.75/14.14
= 0.053
(Note: Calculations are not required)