Practice Problem Q. Based on Exhibit 1, the expected active return from asset allocation for Fund X is: A. negative. B. zero. C. positive Solution B is correct. Active retum from asset allocation is derived from differences between the benchmark weight and the portfolio weight across asset classes. For Fund X, the expected active return from asset allocation is calculated asSolution C Is correct. The IR measures the consistency of active return. The IR is calculated for the three funds as follows:Practice Problem Q. Based on the data presented in Exhibit 2, the candidate with the greatest skill at achieving active returns appears to be: A. Candidate A. B. Candidate B. C. Candidate C. Solution Bis correct. The IR measures the consistency of active return generation. A higher ratio generally indicates better managerial skill at achieving active returns on a risk-adjusted basis. The IR for Candidate B (0.746) is higher than the IR for Candidate A (0.582) and Candidate C (0.723). Thus, Candidate B appears to have the greatest skill, as indicated by the highest IR of 0.746.The benchmark portfolio is the S&P 500. Which of the following three portfolios can be combined with the benchmark portfolio to produce the highest combined Sharpe ratio? S&P 500Portfolio APortfolio BPortfolio C Expected annual return 9.0% 10.0% 9.5% 9.0% Return standard deviation 18.0% 20.0% 20.0% 18.0% Sharpe ratio 0.333 0.350 0.325 0.333 Active return 0 1.0% 0.5% 0 Active risk 0 10.0% 3.0% 2.0% Note: Data are based on a risk-free rate of 2.3%. A. Portfolio A B. Portfolio B C. Portfolio C‘Analyst One says, “The transfer coefficient measures how well the realized returns correlate with the anticipated retus, adjusted for risk.” Analyst Two says, “The transfer coefficient measures how well the realized returns correlate with the active weights, adjusted for risk” Which, iether, analyst is comet? ‘A. Only Analyst One is correct B. Only Analyst Two is correct. CC. Neither analyst is correct Solution C Is correct. The transfer coeticient measures how well the anticipated (ex ane), risk-adjusted Tetums correlate with the risk-adjusted active weights. Ths is also expressed in the equation for the transter coefficient: TC = p(u/o,.w.0) @ incorrect Cconestirewer You Answer A B x c Confidence Level Not Selected Related Lessons: ‘Learn more about this topicManager1 Manager2 Manager3 Aw E(R,) Aw E(R4) Aw E(R,) _RiskRealized Ry Security 1 -0.125 0.03 0.2 0.04 -0.05 0.025 0.17 0.08 Security 2 0.025 0.04 0 0.01 0.05 0.015 010 0.07 Security3 0.075 0.05 -0.1 0 0.05 0.005 0.12 0.04 Security 4 0.025 006 -01002 -0.050015 025 0.02 Practice Problem Q. Suppose all three managers claim to be efficient in portfolio construction. According to the expanded fundamental law of active management, which manager is the best at building portfolios to make full use of their ability to correctly anticipate returns? A. Manager 1 B. Manager 2 C. Manager 3Q. Based on Exhibit 1, which of the following statements regarding Atlanta Asset Management is least likely correct? A. The manager is likely a closet indexer. B. On a risk-adjusted basis, the manager has added value. C. The manager's strategy has not added value on a risk-adjusted basis. Solution A. Incorrect. This statement is correct.Q. How should Cook most likely respond to Moore's request for her opinion? A. There is a lack of decision independence. B. There is more accuracy when accessing the skill level C. There are no limitations for using the fundamental law across all asset classes. Solution A. Correct. A limitation of the fundamental law with the active management of fixed-income portfolios is the lack of decision independence. Virtually all bonds have some form of duration risk, credit risk, and optionality, so their returns are highly correlated in subtler ways.Q. Lange is /east likely to use the Sharpe ratio to evaluate the ex post portfolio returns of: A. Manager 1. B. Manager 2. C. Manager 3. Solution A. Incorrect because Portfolio A has neither cash nor leverage as a component of its investment decisions. B. Correct. The Sharpe ratio is unaffected by the addition of cash or leverage in a portfolio and would thus not be appropriate to evaluate a portfolio in which an allocation to cash was a key part of the investment decision process. C. Incorrect because Portfolio C has neither cash nor leverage as a component of its investment decisions.Q. As described in Exhibit 3, with respect to the Fundamental Law of Active Management, Dieter is least likely correct in his observation about: A. breadth. B. the information ratio. C. the transfer coefficient. Solution A. Incorrect because the breadth of a portfolio is equal to the number of investment decisions, assuming the returns are uncorrelated. If returns are correlated, as one would expect for countries located in the same region and mostly sharing the same currency, then breadth is lower.