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Questions and Answers
What does the breadth (BR) of a portfolio represent?
What does the breadth (BR) of a portfolio represent?
Which formula represents the expected active return, E(RA)?
Which formula represents the expected active return, E(RA)?
What does the transfer coefficient (TC) indicate in the fundamental law of active management?
What does the transfer coefficient (TC) indicate in the fundamental law of active management?
Which of the following parameters is NOT involved in the full fundamental law formula for expected active return?
Which of the following parameters is NOT involved in the full fundamental law formula for expected active return?
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How is the information ratio (IR) related to active management?
How is the information ratio (IR) related to active management?
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What is the formula for the return on a combined portfolio?
What is the formula for the return on a combined portfolio?
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Which of the following statements about volatility of the combined portfolio is true?
Which of the following statements about volatility of the combined portfolio is true?
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The Sharpe ratio for the combined portfolio is equivalent to the Sharpe ratio of which element?
The Sharpe ratio for the combined portfolio is equivalent to the Sharpe ratio of which element?
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What criterion is considered the best for assessing active performance among various managed funds?
What criterion is considered the best for assessing active performance among various managed funds?
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According to the fundamental law of active management, what limits the active return in a managed portfolio?
According to the fundamental law of active management, what limits the active return in a managed portfolio?
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What does the total risk of an actively managed portfolio consist of?
What does the total risk of an actively managed portfolio consist of?
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Which mathematical expression correctly represents the relationship between the squared Sharpe ratio and the squared information ratio?
Which mathematical expression correctly represents the relationship between the squared Sharpe ratio and the squared information ratio?
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What represents the optimal risky asset portfolio according to mean-variance theory?
What represents the optimal risky asset portfolio according to mean-variance theory?
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What does the formula $R_A = R_P - R_B$ represent in active management?
What does the formula $R_A = R_P - R_B$ represent in active management?
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If $∆w_i$ is negative, how is this assessed against the benchmark weight?
If $∆w_i$ is negative, how is this assessed against the benchmark weight?
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Which of the following is NOT a quality for a benchmark to serve as a relevant comparison in active management?
Which of the following is NOT a quality for a benchmark to serve as a relevant comparison in active management?
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In the context of value added, which of the following represents asset value added from security selection?
In the context of value added, which of the following represents asset value added from security selection?
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What is the Sharpe Ratio used to measure?
What is the Sharpe Ratio used to measure?
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What is the implication of adding cash or leverage to a portfolio with respect to the Sharpe Ratio?
What is the implication of adding cash or leverage to a portfolio with respect to the Sharpe Ratio?
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What does $R_A = ∑ ∆w_j R_{B,j} + ∑ w_P,j R_{A,j}$ specifically reflect?
What does $R_A = ∑ ∆w_j R_{B,j} + ∑ w_P,j R_{A,j}$ specifically reflect?
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Which mathematical relationship signifies an 'overweight' position compared to the benchmark weight?
Which mathematical relationship signifies an 'overweight' position compared to the benchmark weight?
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What component is included in the calculation of the standardized return formula for a portfolio?
What component is included in the calculation of the standardized return formula for a portfolio?
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What does the term $R_{A,i}$ represent in the context of active security returns?
What does the term $R_{A,i}$ represent in the context of active security returns?
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How can the active security return be calculated using a multi-factor statistical model?
How can the active security return be calculated using a multi-factor statistical model?
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What does the transfer coefficient (TC) measure?
What does the transfer coefficient (TC) measure?
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What is the information coefficient (IC) based on?
What is the information coefficient (IC) based on?
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Which formula represents the expected active portfolio return?
Which formula represents the expected active portfolio return?
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In the expression $TC = ext{COR}( rac{μ}{σ}; Δw_i) rac{σ_i}{σ}$, what does $μ$ represent?
In the expression $TC = ext{COR}( rac{μ}{σ}; Δw_i) rac{σ_i}{σ}$, what does $μ$ represent?
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The term $β_{j,i}$ in the multi-factor model represents what?
The term $β_{j,i}$ in the multi-factor model represents what?
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Which of the following statements regarding active security returns is true?
Which of the following statements regarding active security returns is true?
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What does the symbol $ orall$ signify in the equation for the expected active return?
What does the symbol $ orall$ signify in the equation for the expected active return?
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Which measure must be adjusted for risk to obtain the transfer coefficient?
Which measure must be adjusted for risk to obtain the transfer coefficient?
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Study Notes
Investment Risk Management 2024-2025
- Course code: 6FNCE001C
- Institution: Westminster International University in Tashkent
- Course is about investment risk management specifically in the context of active portfolio management.
Active Portfolio Management
- This module analyzes active portfolio management.
- Active portfolio management focuses on generating value-added returns.
- The course covers active management, risk and return, and the fundamental law of active management.
Active Management and Value Added
- Measuring Value Added: Active return is the difference between portfolio and benchmark returns.
- Active Return = Portfolio Return - Benchmark Return
- RA = RP - RB
- Value added formula: N RA= ∑ Awi Rai i=1
- Awi is positive -> portfolio is overweight the benchmark
- Awi is negative -> portfolio is underweight the benchmark
Comparing Risk and Return
- Sharpe Ratio: A way to measure risk adjusted return
- Sharpe Ratio = (Portfolio Return - Risk-Free Rate) / Portfolio Volatility
- SR = (Rp - rf)/Std(R)
The Fundamental Law of Active Management
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The active management's expected return is a key parameter that is made up of several factors.
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The expected value added depends on factors like transfer coefficients, information coefficients, breadth, and active risk.
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A critical concept is the concept of the transfer coefficient.
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This represents the correlation between the forecasts of returns and the actual weights used in the investment portfolio.
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The information coefficient is measured by the correlation between forecasts and realized returns, adjusted by risk.
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The main idea expressed is: Expected active return = Transfer Coefficient * Information Coefficient * √Portfolio Breadth
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Description
This quiz focuses on key concepts of investment risk management, particularly within the scope of active portfolio management. Topics include measuring value added, the Sharpe ratio, and the fundamental law of active management. Test your understanding of these critical financial principles and terms.
