Total Active Risk

CFA Level III
#1

I understand the formula to get Total active risk and how we use that with other formulas to get true information ratio. My main question is total active risk the same as portfolio active risk?

Also I know true information ratio = true active return / true active risk

Is there two ways to calculate information ration??

  1. active return / tracking risk = IR

  2. information coefficient x square root of Investor breadth = IR

#2

Bueller?

#3

Option 2 is an approximation based on the Fundamental Law of Active PM as opposed to an exact calculation

#4

Thanks!

#5

I saw a question is Schweser that asked for True IR and used the formula

IR = Tota l AReturn/ Total ARisk,

instead of

True IR = True AReturn/ True ARisk

Does anyone understand, when which of these formulas should be used? If question asks for True Information ratio can we use either of the aforementioned formulas??? This one is blowing my mind, been looking at this for ages, your help would be greatly appreciated

#6

How did they calculate Total Active Risk/Return for the inputs?

#7

They solved as you would for IR, not True IR…Total Active Return = Portfolio weight * Active return… And Total Active Risk = Square root (portfolio weight^2 * Active Risk ^2)… Any idea why???

#8

I would say the problem assumes a correctly specified benchmark and thus misfit risk/return is nil.

#9

It must I guess, thanks for feedback