Exercise -2 The investor has an active risk target of no more than 1.75% and a target information ratio of at least 0.9. The investor can choose from passive management, enhanced indexing, or three active managers (X, Y, and Z) in the figure below. Given the targeted active risk, the investor makes the allocations to maximize return. Note that, by definition, the active return and risk to passive indexing is 0%. Assume that the correlations between the equity managers' active returns are zero. Expected Active Expected Active Allocations Return Risk 0.00% 0.00% 10% Passive index Enhanced indexing 1.40% 2.20% 40% Active Manager X 1.70% 2.80% 25% 3.00% 5.10% 15% Active Manager Y Active Manager Z 3.70% 7.00% 10% Required: Go Calculate the investor's active return given the above allocations. Determine if the investor has met the targeted active risk and information ratio. 16 Exercise -2 The investor has an active risk target of no more than 1.75% and a target information ratio of at least 0.9. The investor can choose from passive management, enhanced indexing, or three active managers (X, Y, and Z) in the figure below. Given the targeted active risk, the investor makes the allocations to maximize return. Note that, by definition, the active return and risk to passive indexing is 0%. Assume that the correlations between the equity managers' active returns are zero. Expected Active Expected Active Allocations Return Risk 0.00% 0.00% 10% Passive index Enhanced indexing 1.40% 2.20% 40% Active Manager X 1.70% 2.80% 25% 3.00% 5.10% 15% Active Manager Y Active Manager Z 3.70% 7.00% 10% Required: Go Calculate the investor's active return given the above allocations. Determine if the investor has met the targeted active risk and information ratio. 16