Financial Risk Manager Part 2
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Given the recent performance data of a fund manager and a current risk-free interest rate of 1.2%, which of the following statements correctly assesses the situation?
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A
The manager's average active return is below 2%, therefore the manager breached the limit.
B
The manager's average return in excess of the risk-free interest rate is below 2%, therefore the manager breached the limit.
C
The volatility of active returns achieved by the manager is below 2%, therefore the manager did not breach the limit.
D
The volatility of returns achieved by the manager is below 2%, therefore the manager did not breach the limit.
Explanation:
The correct answer is C. The explanation provided in the file content states that tracking error is the standard deviation of active returns, which is defined as the excess return over a benchmark. In this scenario, the volatility of active returns, which represents the tracking error, is 1.7%. Since this value is below the 2% limit set by the pension fund, the manager did not breach the limit. The other options (A, B, and D) are incorrect because they refer to different metrics and criteria that are not relevant to the tracking error limit. The manager's average active return, average return in excess of the risk-free interest rate, and volatility of returns are not the correct measures to determine compliance with the tracking error limit.
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