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.