Explanation:
Both statements are correct. Statement I is true because transaction costs are incurred at the time of trading, while alpha and active risk are typically measured on an annualized basis. To make them comparable, transaction costs must be amortized over the anticipated holding period. Statement II is true as the annualized transaction cost is mathematically defined as the round trip cost divided by the expected holding period in years. This allows portfolio managers to properly adjust expected returns for the drag of transaction costs.
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Q.61 Richard Cryer, FRM, is a fund manager in New York. During a workshop with junior managers, he made the following comments:
I. The correct way to compare transactions costs incurred on the annual rate of gain from alpha and the annual rate of loss from active risk is to amortize the transactions costs where the rate of amortization depends on the anticipated holding period.
II. The annualized transactions cost is given by round trip cost divided by the holding period in years.
A
Only I is correct
B
Only II is correct
C
Both I and II are correct
D
Both I and II are incorrect