“If we reduce the tracking error of the manager with the highest active risk, this is
very likely to reduce the plan-wide active risk of the overall portfolio.”
“If we reduce the tracking error of the manager with the highest active risk, this is
very likely to reduce the plan-wide active risk of the overall portfolio.”
Quick calc to prove:
active risk is a standard deviation so:
Mgr 1 Risk = 2%
Mgr 2 Risk = 1.5%
50/50 weight
so
[.5^2*.02^2+.5^2*.015^2]^1/2 = 1.25%
You can take out Manager 1 and risk actually increases becuase active risk is uncorrellated.
T .
If active returns are un-correlated then total tracking risk is nothing but the root mean squared weighted tracking risk of all managers. If any component of the RMS weighted values is reduced , the value itself reduces. If there are correlations present then this is not straightforward.
you reduce active risk for one manager - you are also going to reduce the active return overall.
and as a result the active risk movement direction would not be known clearly.
I think it is FALSE.
stingreye wrote:
Quick calc to prove:
active risk is a standard deviation so:
Mgr 1 Risk = 2%
Mgr 2 Risk = 1.5%
50/50 weight
so
[.5^2*.02^2+.5^2*.015^2]^1/2 = 1.25%
You can take out Manager 1 and risk actually increases becuase active risk is uncorrellated.
Your updated equation would be [.5^2*.00^2+.5^2*.015^2]^1/2 = [.5^2*.015^2]^1/2 = .75% so the active management did decrease.
Fin , truong and serious are correct .
The ans. is True.
The q does not talk about active return , but the only way one can reduce tracking risk is by cutting active return . In any case that will reduce the overall portfolio tracking risk.
I can’t think of any scenario where the “highest tracking risk manager” even matters .
All that is important is that the weights ( allocations ) are unchanged and the active returns are un-correlated.
发表于 2013-4-19 15:45
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