In reviewing the relative performance of Manager B from Exhibit 1, Parker makes the following statements:
He faced more volatile markets than the others did, based on the tracking errors.
He used currency overlays to lever the returns of securities held in foreign currency.
His excess return looks like it is more a matter of luck than skill
Which of Parker’s statements about Manager B in Exhibit 1 is most appropriate? The statement about:
A. tracking errors.
B. excess return.
C. currency overlays.
A: incorrect, because tracking error does not measure portfolio volatility.
C: incorrect, because overlays are used to hedge, not lever, returns of securities.
B: correct “The proper measure of skill is the tracking error. Manager B has the highest tracking error.” Therefore, Manager B’s excess return is because of luck. What? Help, please?