# Study Session 17: Portfolio Management: Economic Analysis, Active Management, and Trading

## Active Portfolio Management Q14

Hello guys,

I refer to Q14- can someone please explain how CFAI comes up to 0.1765 for Scurity 1?

## Pegged order

This is not really needed for the purpose of the exam,however, pegged orders are a type of advanced orders that are provided by online brokers.

When we are saying that we allow the limit price to float around a certain percentage, at what price is the trade being executed?

Can someone provide me an actual example?

I know that the effective spread is the difference between the executed price and the midpoint price, but what exactly are we trying to do with it? Why isnt the quoted spread enough to measure the costs of trading in the market? How do we interpret it?

## Optimal level of active risk

I read few posts here and there about optimal level of active risk and i do not seem to understand with intuition and even by looking at the formula, what we are trying to say.

## Benchmark

James Frazee is chief investment officer at H&F Capital Investors. Frazee hires a third-
party adviser to develop a custom benchmark for three actively managed balanced funds he oversees: Fund X, Fund Y, and Fund Z. (Balanced funds are funds invested
in equities and bonds.) The benchmark needs to be composed of 60% global equities
and 40% global bonds. The third-party adviser submits the proposed benchmark to Frazee, who rejects the benchmark based on the following concerns:
Concern 1: Many securities he wants to purchase are not included in the

## Closet Index Fund

An analyst is given the following information about a portfolio and its benchmark. In particular, the analyst is concerned that the portfolio is a closet index fund.1 The T-bill return chosen to represent the risk-free rate is 0.50%.
Benchmark ; Portfolio
Return 8.75%;  8.90%
Risk 17.50% ; 17.60%
Active Return 0.00% ; 0.15%
Active Risk 0.00% ; 0.79%
Sharpe Ratio 0.4714;  0.4773
Information Ratio N/A ; 0.1896
Which of the following three statements does not justify your belief that the portfolio is a closet index?

## Sharpe Ratio

Can we have ever a benchmark’s Sharpe ratio to be ever be equal to or close to a Sharpe ratio of an actively managed portfolio?

## Sharpe Ratio of an Actively Managed Portfolio

First of all, I am a bit confused with the idea that the optimal portfolio is composed of a benchmark portfolio and of an actively managed portfolio. I felt like all this time, the optimal portfolio was about combining a risky asset and risk free asset.

Second,  whats the logic behind the formula of the Sharpe ratio of an actively managed portfolio? I cant seem to understand the logic behind this concept and feel stuck when I am asked to find the sharpe ratio of a combined portfolio made of the benchmark and an actively managed portfolio.