[Santo AshokParticipant]

Question 25 – 26 in the cfa practice question session

 

[Madhusudan Chandarasekaran, CFA, FRMKeymaster]

Question 25)

All three managers claim to be good at forecasting return. According to the expanded fundamental law, which manager is best at efficiently building portfolios by anticipating future retu

Question 25)

All three managers claim to be good at forecasting return. According to the expanded fundamental law, which manager is best at efficiently building portfolios by anticipating future returns?”
Here, “good at forecasting return” means Information Coefficient (IC) matters most.
IC measures how well expected returns line up with realized outcomes.
The manager with the strongest alignment between expected returns and active weights is the best forecaster.
From the table, Manager 3 shows the most consistent and economically sensible alignment between expected returns and active bets and has the highest IC.
✅ Answer: C. Manager 3

Question 26
“All three managers claim to be efficient in portfolio construction. According to the expanded fundamental law, which manager is best at building portfolios to make full use of their ability to correctly anticipate returns?”
Here, forecasting skill is assumed equal. What matters is Transfer Coefficient (TC).
TC measures how efficiently a manager converts forecasts into portfolio positions.
A higher TC means better portfolio construction given the same skill. From the active weight patterns and constraints implied in the table, Manager 2 uses their forecasts most efficiently.
✅ Answer: B. Manager 2

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