Continue from the previous question. The actively managed portfolio has an information ratio of 0.5 and active risk of 10%. The benchmark portfolio has a Sharpe ratio of 0.4 and total risk of 15%. If the actively managed portfolio is constructed with the optimal level of risk (18.75%), the total expected excess return of this portfolio will be ______.

Correct Answer: 15.375%

The actively managed portfolio will have an expected active return of 0.5 x 18.75% = 9.375% over the benchmark. Since the benchmark'??s excess return is 0.4 x 15% = 6%, the total expected excess return is 9.375% + 6% = 15.375%.