不是很理解两个limitation和一个strength，请解释一下，谢谢！
Nebbiolo Case Scenario
Francesca Barolo is an equity portfolio manager at Gruppo Nebbiolo, Spa, an investment management firm located in Turin, Italy. She is meeting with Diego Moscato, the equity research manager at Dolcetto Partners, with the objective of receiving a buy rating on her funds from this key institutional investment consulting firm.
Barolo and Moscato meet to discuss the firm’s investment philosophy, team, and process, as well as her performance track record. Barolo tells Moscato that she firmly believes in active management and her ability to add value relative to a benchmark because markets are inefficient.
Barolo starts the meeting by stating that the criteria for benchmark selection is as follows: “It should be market capitalization weighted and should reflect the opportunity set available. The positions can be replicated at a low cost, weights are known ex ante, and return data are timely on an ex post basis. Value added is calculated as the sum of the active asset allocation decisions and the weighted sum of the value added from security selection. The firm conducts performance attribution based on a decomposition of value added into several sources, which include asset allocation, sector selection, and security selection.”
The meeting then progresses to a discussion of the risk and return measures presented in Exhibit 1. Barolo notes that during this period, the risk-free rate was 1.75%, and the benchmark return was 9.00%.
Moscato tells Barolo that he likes to measure the consistency of active returns when reviewing and comparing managers. Because Barolo manages three funds, he was going to rank them in his analysis.
Moscato asks Barolo, “As an active manager, what is your approach to generating excess returns?”
Barolo responds, “I am a firm believer in the fundamental law of active management” and makes the following three points to support her view:
- Point 1: The productivity of an active portfolio manager depends on both the skill level and how many opportunities are identified and put to use in the funds. The information ratio measures how much active return has been earned for the level of active risk taken.
- Point 2: The information coefficient is the correlation between forecasted active returns and realized active returns. The transfer coefficient measures the degree to which a fund manager’s forecast is translated into active weights.
- Point 3: Breadth is important and represents the number of independent decisions a fund manager makes in constructing the portfolio. Mathematically, breadth can be expressed as the number of independent investment opportunities squared.
Barolo’s and Moscato’s discussion evolves into a debate about the strengths and limitations of the fundamental law of active management. Barolo provides her perspective, “The strength of the fundamental law of active management is that it provides a framework for evaluating and comparing managers based on skill. It can even produce operational measurements of the essential elements of an active management strategy. However, it also has some limitations. First, it does not consider covariances in calculating breadth. Second, it cannot measure ex ante value added.”
Barolo is least likely correct with regard to which aspect of the strength and limitations of the fundamental law of active management?
A.The strength
B.First limitation
C.Second limitation
Solution
C is correct. Barolo provides Moscato with several strengths and limitations of the fundamental law of active management, although her list is not exhaustive. Her comment regarding the strengths are correct as is the first point regarding covariances in calculating breadth. Her comment regarding the inability to measure ex ante value added is not correct; the model can measure both ex ante and ex post value added.
A is incorrect. Barolo is correct regarding the strengths of the fundamental law of active management.
B is incorrect. Barolo is incorrect that the fundamental law of active management does not consider covariances in calculating breadth.
Analysis of Active Portfolio Management Learning Outcomes
- Describe the practical strengths and limitations of the fundamental law of active management
