Why is the objective function for both Manager B and Manager C explicit?
A case can be made that both of these managers’ objective functions are not explicit, given the fact that their implementation approaches are discretionary.
Thanks
Manager B also uses sophisticated models to make explicit three-year forecasts of the growth of free cash flow to determine the attractiveness of each security’s current valuation.
Using technical analyses and econometric methodologies, [Manager C] produces several types of forecasts. The manager uses this information to determine appropriate sector weights.
How they go about maximizing the value of their objective function doesn’t say anything about whether their objective function is explicit or implicit.
I’m having the same issue with this as the CFAI text doesn’t provide a good example of what would be considered a non-explicit objective function. From what I can tell, if there is a specific numerical constraint, they consider it explicit. (i.e., cannot be more than a 2% weight for any security) The textbook states that when an explicit objective function is not used, we turn to heuristics via a ranking system. (i.e., we rank 20 securities based on their book value and their proportion to each other determines the weight).
This doesn’t entirely make sense to me, so it would be nice to get more thoughts to tie it together. Thanks!