THREE INVESTMENT MANAGERS ARE BEING EVALUATED FOR MANAGING AN EQUIT...

9. Three investment managers are being evaluated for managing an equity fund. The managers’

expected active returns and active weights for three securities are given below. The risk of

these stocks and their actual active returns are also given:

Manager 1 Manager 2 Manager 3

Active

Realized

E

(R

)

wt.

wt. E (R

) Risk

R

Descon Co. 0.05 0.02 0.075 0.04 -0.05 0.02 0.15 0.06

Huda Co. -0.025 0.01 0.03 0.025 0.05 0.04 0.17 0.02

JJ Co. 0.03 0.04 -0.1 0.01 0.02 0.05 0.13 0.04

Suppose all three managers claim to be good at forecasting returns. According to the full

fundamental law of active management, which manager is the best at building portfolios by

anticipating future returns?

A. Manager 1.

B. Manager 2.

C. Manager 3.