QUESTION FIVE

1. Differentiate between active and passive portfolio management. (2 Marks)
2. Explain the two main strategies in passive portfolio management and comment on the effectiveness of the strategies in achieving the desire outcome.

(6 Marks)

3. Suppose two investors have formed portfolios, A and B, designed to track a particular bench mark. Over a period of three years, the returns to the portfolios as well as the index returns were as follows:

YR	QUARTER	MANAGED PORTFOLIO A (%)	MANAGED PORTFOLIO B (%)	BENCHMARK
2013	1	4.3	3.9	4.2
2013	2	-3.8	-4.8	-4.7
2013	3	11	10.5	9
2013	4	2.3	3.2	2.7
2014	1	1.1	0.8	0.2
2014	2	3.4	3.5	4.8
2014	3	8.9	8.5	9.3
2014	4	-0.7	-0.6	0.9
2015	1	8.2	7.9	6.2
2015	2	4.3	4.9	8
2015	3	5	3	7
2015	4	0.2	0.3	5

1. Define tracking error in the context of passive portfolio management.

(1 Mark)

2. Calculate the annualized tracking errors for the portfolios for this period and comment on the performance of the managed portfolios?(11 Marks)

[TOTAL: 20 MARKS]