# TC transfer coefficient

Can anyone help explain this formula?

TC = corr(acive_return/sigma , weights * sigma)

i’m trying to wrap my head around how this formula relates to the intuitive definition of TC being “actual weights vs. optimal weights”. The formula doesn’t seem to equate to that

I just did a quick Excel calculation and concluded that it doesn’t relate to the definition at all.

I think the link is that the equation for optimal weights uses the active returns and forecasted volatility. Specifically, look at the formula for the mean-variance optimal active weights.

Too deep for me… this question WILL not be on the exam

but one of the EOC questions use that to solve for the transfer coefficient so i just wanted to know what the intuition behind this formula is otherwise i’ll just be memorizing yet another formula

Yea I ain’t memorizing that. All I know is TC is the ability to convert forecasted active returns into weights and that TC =1 for unconstrained portfolios, and <1 for constrained portfolios. If this shows up on the exam, I’ll take it as 3 minutes gained for other questions.