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Answer: greater than the expected active return of Portfolio 2.
## Explanation The expected active return can be calculated using the Fundamental Law of Active Management formula: **Expected Active Return = Information Coefficient × √Breadth × Active Risk** **For Portfolio 1:** - IC = 0.12 - √Breadth = √64 = 8 - Active Risk = 2% - Expected Active Return = 0.12 × 8 × 2% = 1.92% **For Portfolio 2:** - IC = 0.08 - √Breadth = √81 = 9 - Active Risk = 3% - Expected Active Return = 0.08 × 9 × 3% = 2.16% However, this calculation assumes the transfer coefficient is 1. The question doesn't provide transfer coefficients, so we need to compare the components: Portfolio 1 has a higher information coefficient (0.12 vs 0.08) but lower breadth (64 vs 81) and lower active risk (2% vs 3%). The higher IC in Portfolio 1 more than compensates for the lower breadth and active risk, making its expected active return greater than Portfolio 2's.
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An analyst gathers the following information about two portfolios:
| Portfolio | 1 | Portfolio 2 |
|---|---|---|
| Breadth | 64 | 81 |
| Information coefficient | 0.12 | 0.08 |
| Active risk target | 2% | 3% |
The expected active return of Portfolio 1 is:
A
less than the expected active return of Portfolio 2.
B
equal to the expected active return of Portfolio 2.
C
greater than the expected active return of Portfolio 2.