Components of Realized Active Risk

CFA Level II Portfolio Management
#1

Hi guys,

In the Wiley study text, the following statement is given:

Realized Active Return Variance can be broken down into two parts:

  1. Variation due to the realized Information Coefficient: Studies have shown that the proportion that can be attributed to this part is TC2.

  2. Variation due to the Noise induced by constraints on the portfolio : Studies have shown that the proportion that can be attributed to this cause is 1-TC2.

My question is: constraints on the portfolio already go into the computation of the Transfer Coefficient, TC. So how can noise induced by constraints on the portfolio cause 1-TC2 of a proportion to the Realized Active Return Variance.

Aren’t they both the same?

Regards,