CMA Final · Strategic Financial Management · Portfolio Performance Evaluation and Portfolio Revision
A fund returned 15% in a year against a benchmark return of 12%. The fund's tracking error (standard deviation of active return) was 4%. What is its information ratio?
The information ratio is 0.75. It equals the active return over the benchmark, 15% minus 12% = 3%, divided by the tracking error of 4%, showing the excess return earned per unit of active risk taken.
- A0.75Correct
- B3.75
- C1.33
- D0.30
Explanation
Information ratio = (Rp - Rb) / tracking error = (15 - 12) / 4 = 0.75. The 3.75 option divides the total fund return by tracking error. The 1.33 option inverts the ratio.
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