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FRM Part II · FRM Exam Part II · Alpha (and the Low-Risk Anomaly)

A manager reports an information ratio of 0.50 with active return of 2% relative to the benchmark. What is the manager's tracking error?

Tracking error is 4.0%. The information ratio equals active return divided by tracking error, so dividing the 2% active return by 0.50 gives 4%. A higher tracking error for the same active return would lower the ratio.

  1. A1.0%
  2. B4.0%Correct
  3. C0.25%
  4. D2.5%

Explanation

Information ratio = active return / tracking error, so tracking error = 2% / 0.50 = 4.0%. Multiplying instead of dividing gives 1.0%.

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