Consider the following relationships: A = P – B S = B – M where: A = the management’s active management decisions P = the investment manager’s portfolio return B = the benchmark return S = the manager’s investment style M = the market index In the context of systematic bias which of the following outcomes is most desirable: A) A manager’s active decisions should be positively correlated with the manager’s investment style. B) A manager’s active decisions should be negatively correlated with the manager’s investment style. C) A manager’s active decisions should be uncorrelated with the manager’s investment style. Your answer: A was incorrect. The correct answer was C) A manager’s active decisions should be uncorrelated with the manager’s investment style. A manager’s active decisions should be uncorrelated with the manager’s investment style. Any clue why?? I thought it’s A…
I beleive A would imply that the manager’s active return vs broad market would be largely the result of his style and not his active stock picking within the style.