Reading 54:Example 6,qns 1 under PM topic. Necessary to know the calculation of TC & IC for exam purpose?

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maxirun

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In Example 6, qns 1 of Reading 54:Analysis of Active Portfolio Mgt, it is require to calculate Transfer Coefficient (TC).
The answer provided states “The transfer coefficient is the correlation between the risk-weighted expected active returns and actual active weights: TC = COR(Δwiσi,μi/σi), where COR denotes correlation (for example, you can use the Microsoft Excel function CORREL) with four pairs of numbers. For example, the risk-weighted values for Security #1 are Δw1σ1 = 0.06(25.0) = 1.5% and μ1/σ1 = 5.0/25.0 = 20.0%. The correlation coefficient across all four securities (calculated in Excel) is TC = 0.58. “
In practice qns under no.14 & 15 of same Reading require us to calclate both TC and IC (Information Coefficient) as well.
Since the calculation involves using MS Excel function: CORREL in order to obtain the answer of TC= 0.58, do you think knowing the calculation parts for TC & IC is still necessary in the exam or it is suffice just to know the purpose of TC & IC ?
Thanks.
(Institute 438)
Institute, CFA. 2016 CFA Level II Volume 6 Derivatives and Portfolio Management. CFA Institute, 07/2015. VitalBook file.
 
Your calculator can handle correlations, and there are ways that they can present material to you that don’t require a long calculation to arrive at the correlation. I would suggest knowing the calculation (i.e. what variables are involved) and interpretation of both items. For example, they could give you the covariance of the two variables and the variance (or standard deviation) of each, and you should be able to calculate the correlation coefficient from that information.
 
Many thanks for your wonderful advice, tickersu! It defintely been a great help!!
 
maxirun wrote:
Many thanks for your wonderful advice, tickersu! It defintely been a great help!!
Click to expand...
Glad to help! Also, try to remember that you will retain many details through practice problems, so don’t worry if some things slip by at first.
 
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