The Theory and Practice of Investment Management: Asset Allocation, Valuation, Portfolio Construction, and Strategies, Second Edition

QUESTIONS

1. In constructing an equity portfolio, which type of tracking error—backward-looking or forward-looking should be used?

2. Calculate the annualized alpha, tracking error, and information ratio based on the 12 monthly returns that follows:

Month	Active Return %
1	0.37
2	–0.31
3	–0.55
4	0.09
5	0.37
6	–0.05
7	–0.62
8	0.06
9	0.46
10	–0.09
11	0.58
12	0.84

3. Assuming active returns are normally distributed, calculate the expected returns about the benchmark at the 67%, 95%, and 99% confidence levels assuming the following data:

Expected active return %	0.02
Tracking error %	0.03
Benchmark expected return %	0.08

4. Explain the philosophy of a:

a. contrarian manager

b. yield manager

5. Determine the size and style orientation of the following equity mutual fund:

6. Construct a graph showing combinations of breadth and depth to produce constant information ratio (IR) with an alpha of 3% and a tracking error of 4%.

7. Use portfolio attribution analysis to assess the active strategies of two managers with the same alpha:

Manager X	Manager Y
Active management return (alpha) %	3.5	3.5
Components of active return:
Market timing	–0.2	–0.1
Sector emphasis	0.5	2
Industry exposure	1.5	1.4
Security selection	2	0.5
Unreconciled return	–0.3	–0.3