What percentage of the total portfolio should be invested in the benchmark for optimal level of active risk? Which formula is used?
The BNP Paribas mutual fund has an information ratio of 0.50. The active risk taken by the fund is 10%. The benchmark portfolio has a Sharpe ratio of 0.80 and total risk of 15%.
Steven Yorgason is an investor who invests his money in the BNP Paribas mutual fund. He invests some portion of his money into the BNP Paribas Mutual Fund and the rest of the portion in the benchmark portfolio. He invests the money such that his active risk is optimal, i.e., the Sharpe ratio of the total portfolio is maximized with that level of risk.