Number of Managers Information Ratio Active Return (bps) Tracking Error (bps) Structured equity Traditional equity 2 4 0.64 0.60 97 240 152 400 TABLE 14.5 Information Ratios and Tracking Errors   Traditional Structured Active Tracking Information Allocation Allocation Return (bps) Error (bps) Ratio 0% 100% 97 152 0.64 10 90 111 143 0.78 20 80 125 146 0.86 30 70 140 160 0.87 40 60 154 184 0.84 50 50 168 214 0.79 60 40 183 248 0.74 70 30 197 284 0.69 80 20 211 321 0.66 90 10 226 360 0.63 100 0 240 400 0.60 of two structured managers are 0.64 and 97 basis points, while the expected information ratio and active return for the group of four traditional active managers are 0.60 and 240 basis points.8 The information ratios for the portfolios of managers are higher than for any individual manager because we've assumed the excess returns are uncorrelated.9 Table 14.4 summarizes our assumptions. How should we build a portfolio that combines the structured and traditional equity products? A simple way to approach this problem is to vary the proportion invested with the two equity programs and assess the impact on the total information ratio and tracking error, as shown in Table 14.5. An interesting pattern emerges in Table 14.5: The information ratio hits its maximum when the investor blends structured and traditional managers. Under our assumptions, the optimal portfolio allocates 70 percent to structured managers and 30 percent to traditional strategies.10 Of course, the optimal proportions will 8These information ratios differ from the top-quartile information ratios in Table 14.2 because here we are building a portfolio of top-quartile managers, whereas in Table 14.2 we are analyzing a top-quartile portfolio of managers. Thus, here we are assuming considerably more skill at manager selection. sThe median correlation between excess returns for the structured and traditional portfolios is 0.07. 10Table 14.5 assumes the allocation of active risk is being considered independently from the strategic asset allocation. Put differently, Table 14.5 assumes the investor first develops a target for total active risk in the U.S. equity portfolio and then optimizes the manager structure.