Question Five

1. Differentiate between active and passive portfolio management. (2 marks)
2. Explain the two main strategies in passive portfolio management and comment on the effectiveness of the strategies in achieving the desired outcome. (6 marks)
3. Suppose two investors have formed portfolios, A and B, designed to track a particular benchmark. Over a period of three years, the returns to the portfolios as well as the index returns were as follows:

Year	Quarter	Managed portfolio A (%)	Managed portfolio B (%)	Benchmark (%)
2013	1	4.3	3.9	4.2
2013	2	-3.8	-4.8	-4.7
2013	3	11	10.5	9
2013	4	2.3	3.2	2.7
2014	1	1.1	0.8	0.2
2014	2	3.4	3.5	4.8
2014	3	8.9	8.5	9.3
2014	4	-0.7	-0.6	0.9
2015	1	8.2	7.9	6.2
2015	2	4.3	4.9	8
2015	3	5	3	7
2015	4	0.2	0.3	5

1. Define tracking error in the context of passive portfolio management. (1 mark)
2. Calculate the annualised tracking errors for the portfolios for this period and comment on the performance of the managed portfolios? (11 marks)

(20 marks)