Skip to content

FRM Part II · FRM Exam Part II · Portfolio Performance Evaluation

A portfolio has an active return of 2.4% versus its benchmark and a tracking error of 4.0%. The manager reports an information ratio, and the sponsor wants to know how much active return would be expected if the manager raised tracking error to 6.0% while keeping the same skill (constant information ratio). What is the information ratio and the implied active return?

The information ratio is 0.60, from 2.4% active return divided by 4.0% tracking error. If skill is unchanged, active return scales with active risk, so at 6.0% tracking error the expected active return is 0.60 times 6.0%, or 3.6%.

  1. AIR 0.60; implied active return 3.6%Correct
  2. BIR 0.60; implied active return 2.4%
  3. CIR 1.67; implied active return 10.0%
  4. DIR 0.40; implied active return 2.4%

Explanation

IR = 2.4/4.0 = 0.60. Holding IR constant, active return = 0.60 x 6.0% = 3.6%. Option 1 assumes active return does not scale with risk. Option 2 inverts the ratio.

Did you get it right without looking?

One question tells you little. A timed set on Portfolio Performance Evaluation shows your real accuracy, how long you take and where you lose marks.

Practise Portfolio Performance EvaluationFree diagnostic mock

More Portfolio Performance Evaluation questions