Portfolio Management Techniques Flashcards

A portfolio earns an active return of 2% with tracking error of 4%. What is its information ratio?

Answer: 0.50

IR = active return / tracking error = 2% / 4% = 0.50.

Using the fundamental law of active management, a manager with an information coefficient of 0.05 and breadth of 400 independent bets has an expected IR of about:

Answer: 1.00

IR ≈ IC × √breadth = 0.05 × 20 = 1.00.

A fund that charges active fees but has an active share of 15% and low tracking error is best described as:

Answer: A closet indexer

Low active share and low tracking error indicate holdings that closely mirror the benchmark.

A portfolio weights tech at 25% versus a 20% benchmark weight; benchmark tech returns 10% while the total benchmark returns 6%. What is the Brinson allocation effect for tech?

Answer: 0.20%

Allocation = (25% − 20%) × (10% − 6%) = 0.20%.

Which measure is most appropriate for evaluating a sub-portfolio that will be one of many components in a well-diversified fund?

Answer: Treynor ratio

Treynor uses beta, the relevant risk when unsystematic risk is diversified away at the fund level.

The Sortino ratio differs from the Sharpe ratio because it:

Answer: Uses downside deviation below a minimum acceptable return

Sortino penalizes only harmful volatility below a target return.

A portfolio returns 12% with 20% volatility; the risk-free rate is 2% and market volatility is 15%. What is the portfolio's M²-adjusted return?

Answer: 9.5%

Sharpe = 0.5, so M² return = 2% + 0.5 × 15% = 9.5%.