9. Suppose that based on the analyst's past record, you estimate that the relationship be- tween forecast
Question:
9. Suppose that based on the analyst's past record, you estimate that the relationship be- tween forecast and actual alpha is: Actual abnormal return = .3 X Forecast of alpha Use the alphas from problem 4. How much is expected performance affected by recog- nizing the imprecision of alpha forecasts?
Pension plan sponsors place a great deal of emphasis on universe rankings when evaluating money managers. In fact, it appears that sponsors assume implicitly that managers who rank in the top quartile of a representative sample of peer managers are more likely to generate superior rel- ative performance in the future than managers who rank in the bottom quartile. The validity of this assumption can be tested by regressing percentile rankings of managers in one period on their percentile rankings from the prior period.
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