Skip to content

FRM Part II · FRM Exam Part II · Portfolio Performance Evaluation

A fund has an active risk (tracking error) of 4% and a benchmark return of 6%. Its portfolio return is 8.0%. A second fund has tracking error of 2% and a portfolio return of 7.2% against the same benchmark. Which statement is correct when comparing them on the information ratio?

Fund 2 has the higher information ratio. Fund 1 scores 0.50 (2.0 percent active return over 4 percent tracking error), while Fund 2 scores 0.60 (1.2 percent over 2 percent), so Fund 2 earns more active return per unit of active risk.

  1. AFund 1 has the higher IR because its active return is larger
  2. BFund 2 has the higher IR because it earns more active return per unit of active riskCorrect
  3. CBoth funds have the same IR
  4. DFund 2 has the lower IR because its total return is lower

Explanation

Fund 1 IR = 2.0/4 = 0.50. Fund 2 IR = 1.2/2 = 0.60. Fund 2 delivers more active return per unit of tracking error. Choosing Fund 1 on raw active return ignores the risk taken.

Did you get it right without looking?

One question tells you little. A timed set on Portfolio Performance Evaluation shows your real accuracy, how long you take and where you lose marks.

Practise Portfolio Performance EvaluationFree diagnostic mock

More Portfolio Performance Evaluation questions