CFA Level 2 - Reading 47 Active Portfolio Management – P.546, Q20

CFA Level II Portfolio Management
#1

CFA Level 2 - Reading 47 Active Portfolio Management – P.546, Q20

Hi Everyone,

Based on Exhibit 1 on page 545, since Fund X has the exact same weight as Benchmark Fund (60% equities and 40% bonds), may I ask why the expected returns of these two funds are different? I.e.:

Fund X Expected Return = 10%

Benchmark Expected Return = 9.4%

I understand that Fund X carries 5.2% active risk, so it must produce extra return for compensation compared to the Benchmark fund . But wouldn’t that be an arbitrage opportunity right here, given that investors can just buy Benchmark and short Fund X ?

Many thanks for you help in advance!!