FRM Part II · FRM Exam Part II · Portfolio Performance Evaluation
A manager reports an information ratio of 0.5 versus a benchmark. Tracking error is 4%. What is the manager's active return?
The active return is 2%. The information ratio is active return divided by tracking error, so multiplying 0.5 by the 4% tracking error gives 2%. Inverting the ratio would wrongly produce 8%.
- A8%
- B0.5%
- C2%Correct
- D4.5%
Explanation
Information ratio = active return / tracking error, so active return = 0.5 x 4% = 2%. Dividing instead gives 8%, which inverts the formula.
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