Active Management - Constructing Optimal Portfolios

CFA Level II Portfolio Management
#1

A new reading has been added to Level 2 Portfolio Management (2016 curriculum) - “Analysis of Active Portfolio Management”. In the section 3.3 Constructing Optimal Portfolios, the reading talks about 3 formulas / concepts which are not well explained.

  1. Optimal portfolio allocation between actively managed and benchmark portfolio would maximize the sum of squared Sharpe Ratio of Benchmark and Information Ratio

SR§2 = SR(B)2 + IR2

  1. For unconstrained portfolios, the level of active risk that leads to the optimal result is

σ(RA)=IR/SR(B) σ(RB)

  1. Total Risk of the actively managed portfolio is the sum of the benchmark return variance and active return variance

Can someone please through some light on these formulas - their derivation or how did we get here.

#2

Hi - Any views on the question posted?

#3

I have the same question. need help!

#4

I’m writing the classroom slides for Wiley on that reading as we speak. I’ll get back to you.

#5

Anything new on this topic?

#6

I have the same questions too