SPOILER SCHWESER EXAM 2AM Here is an answer explanation they provie: A portfolio that has a factor beta equal to one for one factor and factor betas equal to zero for all other factors is called a “factor portfolio.” In contrast, a portfolio that has factor betas equal to the benchmark factor betas is called a “tracking portfolio.” Unlike the tracking portfolio, the factor portfolio betas are not identical to the benchmark betas. As a result, factor portfolios have higher active factor risk (which refers to the deviations of a portfolio’s factor betas from those of the benchmark). i take this to mean that since factor portfolios do not follow a benchmark completely and are only exposed to one factor, they have higher active factor risk (more deviations in factors). does this then mean that tracking portfolios, which follow a benchmark’s factors completely but only deviate in their asset allocation, have higher active specific risk (more deviation in security selection)?
anyone?
Dude, don’t read too much into this. By the looks of it, you’ve got the basic idea down correctly. That’s what’s important. I think you’re right though. Besides, isn’t the information ratio more important when dealing with tracking portfolios?
YES the show NY Wrote: ------------------------------------------------------- > SPOILER SCHWESER EXAM 2AM > > Here is an answer explanation they provie: > > A portfolio that has a factor beta equal to one > for one factor and factor betas equal to zero for > all other factors is called a “factor portfolio.” > In contrast, a portfolio that has factor betas > equal to the benchmark factor betas is called a > “tracking portfolio.” > > Unlike the tracking portfolio, the factor > portfolio betas are not identical to the benchmark > betas. As a result, factor portfolios have higher > active factor risk (which refers to the deviations > of a portfolio’s factor betas from those of the > benchmark). > > > > i take this to mean that since factor portfolios > do not follow a benchmark completely and are only > exposed to one factor, they have higher active > factor risk (more deviations in factors). does > this then mean that tracking portfolios, which > follow a benchmark’s factors completely but only > deviate in their asset allocation, have higher > active specific risk (more deviation in security > selection)?
information ratio is the active return divided by active risk (in other words, its the active return standardized). it is used to find if returns are consistent. a high IR is good, because it means that your returns are 5%, 4.9%, 5.1%, 5.02% rather than 10%, 0%, etc. (which yields the same 5% return but much less consistently.). So i dont think information ratio applies to just tracking portfolio.
factor portfolios have lower information ratios