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Answer: The volatility of active returns achieved by the manager is below 2%, therefore the manager did not breach the limit.
The correct answer is C. The manager's volatility of active returns, which is the standard deviation of active returns, is 1.7%. This is below the 2% tracking error limit set by the pension fund. Tracking error is a measure of how closely a portfolio follows a benchmark index and is calculated using the standard deviation of the active returns. Active returns are the returns in excess of the benchmark. In this case, the manager's performance did not breach the limit as the volatility of active returns is less than 2%, making option C the correct choice. The other options are incorrect because they refer to different metrics: average active return (A), average return in excess of the risk-free rate (B), and volatility of total returns (D), none of which are the criteria for tracking error.
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Consider a large pension fund that operates under a tracking error limit of 2%. The recent performance metrics for the fund manager are as follows:
Given these parameters, which of the following statements is correct?
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.
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