FRM Part II · FRM Exam Part II · VaR and Risk Budgeting in Investment Management
A manager has IR of 0.80 and runs a portfolio with targeted active risk (tracking error) of 5%. Using the standard relationship between IR, alpha and active risk, what is the expected alpha?
Expected alpha is 4.00%. The information ratio is alpha divided by active risk, so alpha equals 0.80 multiplied by 5%, which gives 4.00%.
- A0.16%
- B4.00%Correct
- C6.25%
- D5.80%
Explanation
Alpha = IR x active risk = 0.80 x 5% = 4.00%. 6.25% results from dividing 5% by 0.80, the inverted relationship. 0.16% results from dividing 0.80 by 5.
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