BASED ON JHA’S RESPONSE ABOUT PORTFOLIO PERFORMANCE, THE MOST LIKELY CONCLUSION IS, THE PORTFOLIO THAT HAS BENEFITED THE MOST FROM ACTIVE MANAGEMENT IS

20. Based on Jha’s response about portfolio performance, the most likely conclusion is, the

portfolio that has benefited the most from active management is:

A. portfolio Y because of tracking error.

B. portfolio Y because of information ratio.

C. portfolio X because of information ratio.

The following information relates to questions 21 - 22.

Zara Kramer works as a portfolio manager at RCK Investments. She meets with Bill White, the

chief investment officer of a corporate pension fund, to discuss portfolio strategies and

techniques used in the management and risk assessment of the fund. White asks Kramer, “I

would like to understand the model that you use to choose stocks for the pension portfolio?”

Kramer responds, “At RCK, we typically use a multifactor model in which the factors are price-

to-earnings ratio (P/E), financial leverage, and market capitalization.”

Kramer adds, “We measure portfolio risk by using a risk model to decompose active risk into the

following two components – The first component is an ‘active factor risk,’ which is systematic

risk resulting from the differences in factor exposures between the portfolio and the benchmark.

The second component is the active specific risk which is expressed as the individual asset’s

active weight in the portfolio and the variance of returns unexplained by the factors in the

model.”

Finally, Kramer explains the active return and performance evaluation measures for the fund.