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

Why does the expected active return grows with the square root of breadth

E(active return) = IC * square root of breadth * active risk

If IC is one, it means that there is a perfect correlation between forecasted and realized active returns and we would have that active risk is realized every time. Therefore, expected returns would simply be the active risk times the number of independant decisions.  What is the justification for the square root?

It says in the curriculum to look for Buckle 2004 for a more detailed proof, but the full paper is not available online.

Thanks,

Information Ratio not being affected by magnitude of active weights

Hi guys,

In the Wiley study text, the statement reads: “The Information Ratio is not affected by the magnitude of active weights”

Can you please give me an example to explain what this statement means? 

It isn’t clear to me at all, even with the example given in the study text

Thank you and regards

Rankings based on Active Risk vs. Total Risk

Hi guys, 

If one was evaluating which actively managed fund to invest in (amongst a variety of actively managed funds with the same benchmark), should he look at rankings based on Active Risk or rankings based on Total Risk?

Thank you and regards

Intertemporal Rate of Substitution Question

Julie Carlisle is a financial planner at a large wealth management firm. One of her
clients, Esteban Blake, just received a sizable inheritance. He invests a portion of the
inheritance in an annuity that will immediately increase his income by a substantial
amount.

Holding all else constant, the change in Blake’s income will most likely result in:
A an increase in his marginal utility of consumption.
B an increase in his intertemporal rate of substitution.
C a decrease in his required risk premium for investing in risky assets.

CFA PCP Similarity Analysis

Does anyone have any experiencing handling a PCP similarity analysis investigation? 

After taking a couple weeks to calm down, I need to prepare a response to the CFA.

i am thoroughly disappointed and alarmed with how this happened - I walked out of the room confident and excited to receive my results, only to receive this tragic news.

There are no reports from proctors of looking around and I have all my working in my booklet.

Connection between ITRS and bond prices

11th hour states that “if the price of a risk-free bond is less than the investors ITRS, then they would purchase more of the bond. This increase of investment leads to a decline in current consumption, which brings an increase in MUc and a decrease in MUf. Consequently, the ITRS falls until it equals the price of the bond”

I dont understand this. If ITRS is falling, it means times are good. Which means rates should be rising. But how would rates be rising if bond prices are being pushed up by investors that continue to buy them?

Portfolio Management Question - Active Management

This is the last question from Konvexity Mock One PM

Relevant info,
Fund A: IR=.5, active risk=10%
Benchmark: Sharpe=.8, total risk=15%

In order to achieve optimal level of active risk, the investor invests 6.25% in the Benchmark and 93.75% in Fund A. What is the excess return over risk-free rate that is expected to be generated by the portfolio of the investor?

A) 12.69%
B) 14.69%
C) 16.69%

Marginal utility and future payoff

Can someone help me comprehend this phrase:

Asset’s risk premium is high when negative relationship between its future payoff and investor’s marginal utility for future consumption.

Need some help on PM

Ok this EOC is tripping me up…

Blake inherited a sizable amount of money-

  1. Holding all else constant, the change in Blake’s income will most likely result in:

    1. an increase in his marginal utility of consumption. 

    2. an increase in his intertemporal rate of substitution.

    3. a decrease in his required risk premium for investing in risky assets