Portfolio Management - Calculating IC and TC

CFA Level II Portfolio Management
#1

Hello there,

In one of the practice questions, I am asked to calculate IC and TCs of three different managers. As I am looking at the answers, I cannot figure out how it is done…

Question goes that Manager 1 has four securities, with expected return of 0.03, 0.04, 0.05, and 0.06.

Risk is 0.17, 0.1, 0.12, and 0.25 respectively.

Realized returns are 0.06, 0.07, 0.04, and 0.02 respectively.

Changes in weighting is -0.125, 0.025, 0.075, and 0.025 respectively.

So far I understand that you need to calculate the returns on a ‘per unit of risk’ basis. So I’ve done that. But how do you get to the IC? The answer shows 0.5335.

Likewise for TC, the answer is 0.7267.

Any help would be appreciated.

#2

Anyone? :frowning:

#3

Aren’t they provided? Is there any information about restrictions?

#4

IC is the correlation between the (realised returns/risk) and (the expected returns/risk)

TC is the correlation between the (realised returns/risk) and the (Change in weights/risk)

I believe there is an EOC which is similar to this question. Had me puzzled too the first time I saw it.

#5

I would make one correction to the above: TC = correlation btw realized return / risk and change in weights x risk

You have to calculate the correlations (Covariance / st. deviation x st. deviation). One of the blue box examples explains it in details if you would not remember from LI.

But I don’t think we’ll have such a question as it takes long to clalculate correlation manually.

#6

Yea it seems kind of tedious to do even with the calculator function. But who knows its CFAI after all.

#7

I’m using HP calculator, there’s no correlation function (or I don’t know about it???) so really it would be killing. But good to know the concept IC and TC contain.