IAI Actuarial Core Principles · Economic Modelling · Measures of investment risk
A portfolio earned an excess return over its benchmark of 1.5% a year with a tracking error of 3%. What is its information ratio?
The information ratio is 0.50, found by dividing the 1.5% active return by the 3% tracking error. It measures active return earned per unit of relative risk taken against the benchmark.
- A0.50Correct
- B2.00
- C4.50
- D0.05
- 1.50
Explanation
Information ratio = mean active return / tracking error = 1.5/3 = 0.50. Inverting the ratio gives 2.00, which is the typical mistake. Multiplying gives 4.5, which is meaningless.
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