Consider the simple case of four individual securities whose active returns are uncorrelated with each other and forecasts are independent from year to year. The securities have a range of active return forecasts, risks, optimal active weights, and actual active weights as given in the attached exhibit. The optimal active weights are based on a formula for maximizing the active return of a managed portfolio for a given level of active risk. The actual active weights are the result of a numerical optimizer with a number of constraints, in addition to the active risk constraint of 9.0%.

(1) Calculate the transfer coefficient as the risk-weighted correlation coefficient between the four active return forecasts and the four actual weights.

(2) Calculate the forecasted active return and active risk of the managed portfolio using the actual rather than unconstrained optimal active weights.