B IS CORRECT. MANAGERS TEND TO OVERESTIMATE THEIR ABILITY TO OUTPE...

13. B is correct. Managers tend to overestimate their ability to outperform the market hence over

estimate their ICs. Section 6. LO.f.

Set 2 Questions

The following information relates to questions 1 - 3.

Diana Yeatz, is the chief financial officer of the Eckart Foundation, which finances college

education by providing grants and loans to students determined on the basis of merit and need.

Eckart has $1.4 billion in assets managed by external portfolio managers. Yeatz and Ali Nathani,

senior analyst at Eckart, are conducting the department’s quarterly review process of evaluating

active portfolio managers.

Nathani collects the following information for Eckart’s balanced funds, presented in Exhibit 1

and Exhibit 2.

Exhibit 1. Selected Fund Statistics

One-Year Returns Weights One-Year Total Return

Equity Bond Equity Bond

Fund A 15.0% 7.0% 69% 31% 12.52%

Fund B 11.0% 6.8% 66% 34% 9.57%

Benchmark 12.0% 7.0% 60% 40% 10.00%

Exhibit 2. Selected Fund Statistics

Fund A Fund B Benchmark

Five-year annualized return 13.5% 12.8% 10.25%

Standard deviation 14.4% 10.4% 9.60%

Active return 3.25% 2.55%

Active risk 7.00% 2.12%

Risk-free rate 5.5%

Yeatz reviews the fund information, and then asks Nathani to evaluate the managers. The fund

managers have the following characteristics:

Manager 1: A fund made of stocks of companies from the major developed markets. Its

benchmark is the S&P Global BMI.

Manager 2: A fund with a total return objective of exceeding the return of the S&P Global BMI.

The fund can allocate upto 25% to cash.

Manager 3: A fund that holds developed countries’ sovereign bonds. Its benchmark is the S&P

Global Developed Sovereign Bond Index.