9. A is correct. The ability of the fund manager to accurately forecast active returns is measured
by the information coefficient. The IC is found as the correlation between risk-adjusted
active return expectation and risk-adjusted realized active returns:
Risk weighted forecasts [E (R
A)/σ] R
A/σ
Manager 1 Manager 2 Manager 3 Realized
Descon 0.13 0.27 0.13 0.40
Huda 0.06 0.15 0.24 0.12
JJ 0.31 0.08 0.38 0.31
IC 0.461 0.454 (0.248)
Manager 1 has the highest IC. Section 4.1. LO.c.
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