- CFA Exams
- CFA Level I Exam
- Topic 9. Portfolio Management
- Learning Module 45. Analysis of Active Portfolio Management
- Subject 3. The Fundamental Law of Active Management
CFA Practice Question
Consider three individual securities whose active returns are uncorrelated with each other and whose forecasts are independent from month to month. The active managed portfolio is rebalanced every month. Its active risk (σA) is 7.0%. The information coefficient is 0.25. What is the expected active portfolio return?
A. 3.03%
B. 5.25%
C. 10.5%
Explanation: The breadth is 3 x 12 = 36. E(RA) = IC x BR1/2 x σA = 0.25 x 361/2 x 7% = 10.5%.
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