6The optimal level of residual risk depends on the perceived quality of the manager’s information. This is measured by the information ratio IR, a concept discussed in great detail in the next chapter. Optimistic estimates of the information ratio generally range from 0.5 to 1.0. The optimal level of residual risk is

A hopeful manager with an information ratio of 0.75 and total risk aversion of 0.01 would have 37.5 percent residual risk.