Need help with Transfer Coefficient (TC)

[dududu100]

Hello,
In the Kaplan Book, it mentions that Transfer coeeficient (TC)
1. can be thought of as the correlation between actual active weights and optimal active weights.
2. in another paragraph, it states that ” more accurately, transfer coefficient is the cross-sectional correlation between forecasted active returns and the actual weights adjusted for risk
I read these two definitions again and again and just dont see they can be the same (connection). Can someone help explain why TC can be explained in these two different ways? Thanks!

 

[Rob3003]

Bump. Also unclear on this definition. Specifically as it relates to a constrained vs unconstrained active portfolio.

 

[dududu100]

Anyone on this? Also, does anyone know if we are required to calculate the TC and IC for the exam? Thanks!

 

[S2000magician]

The actual definition is:
TC = ρ(μi / σi, Δwiσi)
The curriculum does the same sort of thing that Kaplan does: says that it’s the correlation between the forecasted active returns and the active weights, then later says, “Well, what we really meant is …” the definition above.
I consider it extremely unlikely that you’d have to compute a transfer coefficient.

 

[dududu100]

This is great to know! Thank you for the clarifiaction! Happy Easter!

 

[S2000magician]

You’re quite welcome.
Happy Easter to you as well.