Portfolio managers A and B each manage $1,000,000 funds.Portfolio manager A has perfect foresight and the call option value of his perfect foresight is $180,000.Portfolio manager B is an imperfect forecaster and correctly predicts 60% of all bull markets and 70% of all bear markets.The correct measure of timing ability for portfolio manager B is ______.

Question

Quizplus · Accepted Answer

The correct measure of timing ability for portfolio manager B is the T score, which is calculated as (number of correct market calls - percentage of correct calls expected by chance)/standard deviation of correct calls.

For portfolio manager A, there is perfect foresight, thus the call option value is irrelevant to the calculation of timing ability.

For portfolio manager B, assuming an equal probability of a bull or bear market, the expected percentage of correct calls by chance is 50%. Thus, the T score for portfolio manager B is (0.6-0.5)/√(0.5x0.5x0.4+0.5x0.5x0.3) = 0.30.

Portfolio Managers a and B Each Manage $1,000,000 Funds