FRM Part I · FRM Exam Part I · The Building Blocks of Risk Management
A manager outperformed her benchmark by an average of 3% per year, with a standard deviation of the active return (tracking error) of 4%. What is her information ratio?
The information ratio is 0.75. It divides the average active return over the benchmark, 3%, by the tracking error, the 4% standard deviation of that active return. It measures excess return per unit of active risk taken.
- A0.75Correct
- B1.33
- C0.12
- D3.00
Explanation
Information ratio = active return / tracking error = 3% / 4% = 0.75. Inverting the ratio gives 1.33, which is wrong.
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