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FRM Part II · FRM Exam Part II · Portfolio Risk: Analytical Methods

A manager reports an annual active return of 2.4% with an ex-post tracking error of 4.0%. What is the information ratio, and what does it indicate?

The information ratio is 0.60, found by dividing the 2.4% active return by the 4.0% tracking error. It shows the active return earned per unit of benchmark-relative risk, rather than per unit of total or systematic risk.

  1. A0.60, active return earned per unit of benchmark-relative riskCorrect
  2. B1.67, active return earned per unit of total risk
  3. C0.60, active return earned per unit of systematic risk
  4. D0.96, excess return over the risk-free rate per unit of tracking error

Explanation

IR = active return / tracking error = 2.4/4.0 = 0.60. It uses benchmark-relative risk, not total or systematic risk. 1.67 inverts the ratio.

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