Reading 54 Analysis of Active Portfolio Management [Sharpe Ratio Calculation]

CFA Level II Portfolio Management
#1

Practice Problem #6 Page 461

S&P 500 Indigo Fund

E(annual return) 9% 10.5%

Return Std Dev 18% 25%

Sharpe Ratio 0.333 0.30

Active Return 1.2%

Active Risk 8%

Information Ratio 0.15

I understand that the optimal amount of active risk is caluculated as IR/SR(b) * STD(Rb).

Optimal active risk is 0.15/0.333(18%)= 8.11%

Weight on active portfolio would be 8.11%/8.0% = 1.014 and

Weight on benchmark would be 1- 1.014 = -0.014

To further prove that this is correct the author goes to prove the optimal sharpe ratio is 0.365

How are they calculating total excess return as 6.0% + (1.014* 1.2)= 7.217% where is 6% coming from?

#2

S&P Sharpe Ratio = 0,33333

Sharpe Ratio (Portfolio Return - RFR)/StD --> (9-x)/18=0,33 solve for x --> 6%

#3

Thank you.

#4

That is question is not from Level1. But thank you for the reply

#5

Really? there is more on Sharpe Ratio in other levels?

#6

Solving that equation gives me x–> 3%

#7

Besides Level I it appears only at Level II and Level III.

#8

are they using rm - rf = Market Risk premium … bcos as melissabt has pointed out

solving (9-x)/18 = 0.333 gives x = 3%

#9

Solving for X in that equation gives you x=3% and this represents the risk free rate. However, the question references the excess return which would then be 9-3 = 6%. Make sense?