Hi all! I have a quick question which arose while I have been going through the material. Q13 at the end of Reading 29 (Active Equity Investing: Portf Construction) has the following answer: “Finally, for managers with similar costs, fees, and alpha skills, if two products have similar active and absolute risks, the portfolio with a higher active share is preferred”.
Can you please explain the rationale behind this? I have tried to understand but still, have no explanation.
If two products have the same cost and risks, you would prefer the one with the higher active shares because that means the manager is actually doing work. You prefer managers that are working for their money! Otherwise, you could just get a passive index and pay those 10 bps!
The portfolio with higher active share is associated with lower active risk and you prefer the portfolio with the lowest active risk.
Thank you guys. Why is highest active share associated with lowest active risk? I have not seen that in the book.
It isn’t. From your text, we’re assuming we’d choose the higher active share between two portfolios with the same active risk:
“Finally, for managers with similar costs, fees, and alpha skills, if two products have similar active and absolute risks , the portfolio with a higher active share is preferred”
hi guys,
I am just doing one of the third party mocks and come across with very similar concept.
The question holds the same assumptions.
But saying Manager A has 250 and B has 400 securities in their portfolio.
The answer to this question is saying that the Manager A with 250 securities has higher active share and therefore gains higher return.
Could anyone please explain why the manager with smaller number of securities has higher active share?
let’s assume the manager is benchmarking SP 500, so Manager A can get more returns with less number of security as compared to 500 (benchmark) whereas Manager B has 400 security may be closely following the benchmark. Therefore selecting less good securities than benchmarks securities makes him a good manager and increased the Active share.