Question
You need to evaluate a money manager to manage a $1 billion portfolio. After research, you reasonably expect that the manager will keep the tracking
You need to evaluate a money manager to manage a $1 billion portfolio. After research, you reasonably expect that the manager will keep the tracking error within 100 basis points (BP). You will be satisfied if the manager can keep the tracking error within 100 BP band 92% of the time. Analyzing the manager's past performance, you came to know, nine out of ten quarters, the manager was able to keep the tracking error within 100 BP. You want to compute the probability that the tracking error is within 100 BP band out of nine or fewer quarters in the sample period you analyzed.
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