NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Performance Measurement and Evaluation of Portfolio Managers
A PMS investor gets a 10% annual return on the portfolio. The benchmark returned 8%, and the portfolio's tracking error is 4%. What is the information ratio?
The information ratio is 0.5. It is the active return of 2% over the benchmark divided by the tracking error of 4%, showing how much excess return the manager earned per unit of active risk taken.
- A2.0
- B0.5Correct
- C2.5
- D0.8
Explanation
Active return = 10 - 8 = 2%. Information ratio = active return / tracking error = 2 / 4 = 0.5. The 2.0 option inverts the ratio. The 2.5 option divides the portfolio return by the tracking error (10/4), and the 0.8 option divides the benchmark return by the portfolio return (8/10).
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