Question

A fund manager scrutinizing the record of two market timers comes up with this information:

a. What are the conditional probabilities, P 1 and P 2 , and the total ability parameters for timers A and B?

b. Using the data given in this problem, and the historical data in the previous problem, what is a fair monthly fee for the two timers?

Short answer

a. Timer A

b. C_A(P*) = .44% per month; C_B(P*) = ..40% per month

Step-by-step solution

Calculation of conditional probabilities

	Timer A	Timer B
P1	78/135 =0.58	86/135 =0.64
P2	57/92 =0.62	50/92 =0.54
P*P1+P2-1	0.20	0.18

From the above data, Timer A appears as better forecaster.

Calculation of monthly fee

Let’s use the above value to find the monthly fee:

Formula C(P*) = C(P₁ + P₂ – 1)

C_A(P*) = .022´.20 = .0044 = .44% per month

C_B(P*) = .022 ´ .18 = .0040 = .40% per month