Learning Outcome Statements

1. Active Management and Value Added

a. describe how value added by active management is measured;

2. Comparing Risk and Return

b. calculate and interpret the information ratio (ex post and ex ante) and contrast it to the Sharpe ratio;

3. The Fundamental Law of Active Management

c. state and interpret the fundamental law of active portfolio management including its component terms - transfer coefficient, information coefficient, breadth, and active risk (aggressiveness);

4. Applications of the Fundamental Law

d. explain how the information ratio may be useful in investment manager selection and choosing the level of active portfolio risk;

e. compare active management strategies (including market timing and security selection) and evaluate strategy changes in terms of the fundamental law of active management;

5. Practical Limitations

f. describe the practical strengths and limitations of the fundamental law of active management.