PM - Will we need to calculate TC or will it be given?

CFA Level II
#1

Has anybody seen exercises where we need to calculate the TC based on a correlation matrix, or is it given in most cases?

#2

No, I haven’t seen any. When in doubt, fall back to the LOS. The only “calculate” LOS in the Fundamental Law reading is for the Information Ratio.

#3

May I also ask if we need to calculate these?

  1. Value added = Alpha - (risk aversion x residual risk^2)

  2. Optimal residual risk =IR / 2*risk aversion

  3. Highest value added = optimal residual risk x (IR/2)

#4

Nope. Above 3 we dont have to study

#5

Where have you seen these in the curriculum?

#6

Not these formulas directly, but concepts to do with risk aversion within this topic. These formulas might be from last year.

#7

Curricullum EOC question 15 does require you to calculate TC.So I think we need to be able to calculate it

#8

I cannot imagine you having to calculate the TC.

That’s not remotely the focus of this reading.

#9

Hi S2000magician,

Please check out the curricullum example 6 for this chapter and also EOC question 15.

For the Blue box example 6 they ask us to

Calculate the transfer coefficient (TC) as the risk-weighted correlation coefficient between the four active return forecasts and the four actual active weights. Compare this number with the transfer coefficient for the optimal active weights.

#10

In my Level II review courses, I run through an example of calculating a transfer coefficient.

It’s not going to happen on the exam.

#11

Hopefully

#12

Shall we put a bottle of Scotch on it?

#13

The EOC questions are to help you drill down on the material and understand it at a granular level. If they were to ask a question about that on the exam it would seem to be a waste of one of only 120 questions, the calculation of TC isnt nearly as important as its application & understanding the theory.

#14

Can anyone tell me why we multiply risk aversion by 2? Seems arbitrary, I’d like to know the intuition if there is any… Thanks!

Edit: Nevermind, of course S2000 derived the formula in a thread from 2014 found here: http://www.analystforum.com/forums/cfa-forums/cfa-level-ii-forum/91331325

it still doesn’t help me much, but at least there’s a path to understanding.

#15

I don’t think that is needed in 2016 L2, at least I hope not. i haven’t seen that in the CFAI book at all.