Portfolio Management

Question 1

Information ratio

Answer 1

(Portfolio return - Benchmark return) / Active risk

The higher the information ratio, the greater the consistency of active return. Used as measurement for manager skills.

Can also be calculated using the following formula:
IR = Transfer coefficient * Information coefficient * breadth^(1/2) * portfolio volatility

Question 2

Sharpe ratio ^(1/2)

Answer 2

(Sharpe ratio of the benchmark)^2 + (Information ratio)^2

Question 3

Optimal active risk

Answer 3

Transfer Coefficient * [Information ratio / Sharpe ratio of the benchmark] * Standard deviation of the benchmark

Portfolio constraints reduce transfer coefficient, thereby reducing the optimal aggressiveness.