A large pension fund requires that the fund's managers do not breach the 2% tracking error limit at any point in time. A fund manager's performance for the most recent period is summarized below:

Average return: 2.8%

Volatility of returns: 1.9%

Average return in excess of the benchmark (average active return): 0.6%

Volatility of active returns: 1.7%

If the current risk-free interest rate is 1.2%, which of the following is correct?

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The manager's average active return is below 2%, therefore the manager breached the limit.

The manager's average return in excess of the risk-free interest rate is below 2%, therefore the manager breached the limit.

The volatility of active returns achieved by the manager is below 2%, therefore the manager did not breach the limit.

The volatility of returns achieved by the manager is below 2%, therefore the manager did not breach the limit.

Financial Risk Manager Part 2