FRM Part I · FRM Exam Part I · Modern Portfolio Theory (MPT) and the Capital Asset Pricing Model (CAPM)
A fund returned 10% against a benchmark return of 8%. The fund's tracking error (standard deviation of active returns) is 4%. The fund's beta is 1.1 and total volatility is 18%. What is the fund's information ratio?
The information ratio equals active return divided by tracking error. The fund beat its benchmark by 2 percentage points, and tracking error is 4%, so the ratio is 0.50. Total volatility and beta are irrelevant to this measure.
- A0.50Correct
- B0.11
- C0.17
- D1.10
Explanation
Information ratio = active return / tracking error = (10% - 8%)/4% = 0.50. Dividing by total volatility (2/18 = 0.11) uses the wrong risk base, and dividing by beta (2/1.1 = 1.8%) is a Treynor-style error.
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