FRM Part II · FRM Exam Part II · Portfolio Construction
An unconstrained optimal portfolio has an active risk of 6% and an information ratio of 0.80. Because of a long-only restriction, the manager's transfer coefficient is 0.60. Assuming the constrained portfolio's active risk is held at 6%, what is the approximate expected active return of the constrained portfolio?
The expected active return is about 2.88%. The transfer coefficient of 0.60 scales the unconstrained information ratio of 0.80 to 0.48, and multiplying by 6% active risk gives 2.88%. Ignoring the constraint would wrongly give 4.80%.
- A2.88%Correct
- B4.80%
- C8.00%
- D3.60%
Explanation
Constrained IR = TC x unconstrained IR = 0.60 x 0.80 = 0.48. Active return = IR x active risk = 0.48 x 6% = 2.88%. Using 0.80 x 6% = 4.80% ignores the constraint, and 0.60 x 6% = 3.60% omits the IR.
Did you get it right without looking?
One question tells you little. A timed set on Portfolio Construction shows your real accuracy, how long you take and where you lose marks.
More Portfolio Construction questions
- A portfolio manager allocates capital across three asset classes so that each contributes exactly one-third of total portfolio volatility. W…
- A two-asset portfolio has weights of 60% in equities (volatility 20%) and 40% in bonds (volatility 5%), with correlation 0.20. Portfolio var…
- An asset owner imposes a maximum 5% weight on any single position and a maximum tracking error of 4% versus its benchmark. The optimizer rep…
- Using the fundamental law of active management in its basic form, a manager has an information coefficient (IC) of 0.05 and makes 100 indepe…
- A portfolio manager's mean-variance optimizer, run without any constraints, recommends a highly concentrated portfolio with large long and s…
- A manager has an information ratio of 0.80 and the client permits annualized tracking error of 5%. Assuming the manager scales active risk t…