3. Nathani is least likely to use the Sharpe ratio to evaluate the portfolio returns of:
A. Manager 1.
B. Manager 2.
C. Manager 3.
The following information relates to questions 4 – 6.
Ling Mei, is the chief investment officer at Drexel Corp. responsible for the company’s
employees’ pension fund. She is interviewing Karl Seyfried for the post of an analyst. Mei wants
to determine whether Seyfried is familiar with the portfolio construction and management
process. Mei asks Seyfried about the fundamental law of active management. Seyfried responds,
“According to the fundamental law, the expected active return, is the product of four key
parameters: the transfer coefficient (TC), the information coefficient (IC), breadth, and portfolio
active risk. Managers with better ability to forecast returns or higher IC will add more value over
time. The transfer coefficient is low when there are constraints over portfolio construction, and
breadth is lower for positively correlated securities.”
Mei shares the following information (Exhibit 1) with Seyfried and asks him to evaluate the
portfolio managers.
Exhibit 1. Portfolio Manager Comparison
Manager A Manager B
Based on monthly forecasts of commodity
Based on internal forecasts, the manager
prices and interest rates, the manager
may allocate weights to 20 developed
countries using country-specific ETFs with
allocates weights between a short-term US
treasury bond fund and a commodity
quarterly rebalancing.
exchange-traded fund (ETF). The
benchmark portfolio is 50% commodity
and 50% US T-bond.
Seyfried makes the following notes:
I. Manager A would improve its information ratio by rebalancing more frequently.
II. Manager B has a lower breadth than specified because of the likelihood of positive
correlation of country returns.
III. Because both managers have constrained portfolios, therefore information
coefficients will generally increase with aggressiveness of the strategy.
Mei questions Seyfried about practical limitations of the Fundamental Law of Active
Management. Seyfried answers as follows:
Bạn đang xem 3. - CFA 2018 LEVEL 2 PORTFORLIO QUESTION BANK R51 ANALYSIS OF ACTIVE PORTFOLIO MANAGEMENT Q BANK