An investor uses a core-satellite approach to allocate funds amongst equity managers. The equity manager's active risk, active return and allocations are shown as follows:
|
Expected Active Return
|
Expected Active Risk
|
Allocations
|
|
Passive Index
|
0.00%
|
0.00%
|
10.00%
|
|
Enhanced Indexing
|
1.90%
|
2.50%
|
45.00%
|
|
Active Manager X
|
2.20%
|
3.00%
|
25.00%
|
|
Active Manager Y
|
3.10%
|
6.00%
|
10.00%
|
|
Active Manger Z
|
3.90%
|
7.50%
|
10.00%
|
For the following questions, please assume that there correlations between managers' active returns are zero.
a) Describe the investor's core. What composes it, what allocations are there to the core?
b) Calculate the investor's active return:
c) Calculate the investor's active risk:
d) Calculate the investor's information ratio:
e) Explain why the passive index has zero active return and zero active risk.