1. You have a residual risk aversion of lR = 0.12 and an information ratio of IR = 0.60. What is your optimal level of residual risk? What is your optimal value added?
2. Oops. In fact, your information ratio is really only IR = 0.30. How much value added have you lost by setting your residual risk level according to Problem 4 instead of at its correct optimal level?
Text Book: Active Portfolio Management, 2/E By Grinold.o Management, 2/E By Grinold.