1. What is the information ratio of a passive manager?
2. What is the information ratio required to add a risk-adjusted return of 2.5 percent with a moderate risk aversion level of 0.10? What level of active risk would that require?
3. Starting with the universe of MMI stocks, we make the assumptions
Q = MMI portfolio
fQ = 6%
B = capitalization-weighted MMI portfolio
We calculate (as of January 1995) that
|
Portfolio
B
|
b with Respect to B
1.000
|
b with Respect to Q
0.965
|
s
15.50%
|
|
Q
|
1.004
|
1.000
|
15.82%
|
|
C
|
0.865
|
0.831
|
14.42%
|
where portfolio C is the minimum-variance (fully invested) portfolio. For each portfolio (Q, B, and
C), calculate f, a, w, SR, and IR.