Maximization of the Value Added

CFA Level II Portfolio Management
#1

From Schweser:

Assume that XX has moderate risk aversion (λ=0.10). Which actively managed fund would maximize the value added for XX?

I would have answered this question by using the value-added formula with the specific residual risk and residual return of each of the three funds. However, the answer given by Schweser is basically to calculate the Information Ratio and say that the one with highest IR is the one that maximizes the value added, regardless of risk aversion.

I don’t get it, why do we have the value added formula then? What’s the difference?

Thanks!

#2

If you play with the formula, the last thing you can get is Maximum value-added = (Optimal risk (w) * IR) / 2. So in order to maximize your value-added, choose the manager with the highest IR

#3

Ohh I see, that’s the key, " maximum" value-added…

Thanks!