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CMA Final · Strategic Financial Management · Portfolio Performance Evaluation and Portfolio Revision

A portfolio manager benchmarked to the Nifty 50 delivered a return of 15% in a year, while the benchmark returned 12%. The tracking error (standard deviation of active returns) was 2.5%. The risk-free rate was 6%. What is the information ratio?

The information ratio is 1.20. It equals the active return over the benchmark, 15% minus 12% = 3%, divided by the tracking error of 2.5%. The risk-free rate is irrelevant here because the ratio measures excess return over the benchmark per unit of active risk.

  1. A0.83
  2. B6.00
  3. C1.20Correct
  4. D4.80

Explanation

Information ratio = (Rp - Rb) / Tracking error = (15 - 12) / 2.5 = 1.20. Dividing the raw return by tracking error gives 6.00, which ignores the benchmark. Dividing the benchmark return by tracking error gives 4.80. The risk-free rate is not used in this ratio.

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