Meeting A Tracking Error Objective

CFA Level I Quant
#1

Hello Everyone ,

With reference to CFA curriculam Vol 1 Reading 9 Pg 498 Ex- 5

I am not able to understand why we are calculating F(6) . According to me we should have calculated F(7) + F (8)

to meet the 75 basis band 90% of the time.

Question is : time span = 8 Quarter: money manager success = 6/8 and sponsor expectation 90 % of time money manager will meet the expectaions.

Also why we are using probability = 90%which is an expected probability not exact, why not 6/8 which is probaility for success for money manager

Thanks

#2

Suppose that you have a (very) biased coin: P(H) = 0.9, P(T) = 0.1. It’s possible that in 8 tosses, you’ll get 6 heads and 2 tails. The question is: how likely is that? That’s the question they’re answering.

If you toss the coin 8 times and get 6 heads, can you be certain that P(H) = 0.75? That’s the position you’re advocating.

#3

Hello Magician ,

That means 0.75 is probability is by chance but this does not not reflect permanent probability of success depends on lets say economy .

But on similar note sponsor 0.90 expectation is also biased. In the question it is clearly written that sponsor after research concluded that bais point .75 / quarter is realistic and he is happy if it achievable 90% of the time .

Thanks