FRM Part II · FRM Exam Part II · Portfolio Performance Evaluation
A portfolio manager earns an active return of 2.4% per year over her benchmark, and the annualized standard deviation of her active returns (tracking error) is 4.0%. What is her information ratio?
The information ratio is 0.60. It is the average active return of 2.4% divided by the tracking error of 4.0%, so it measures active return earned per unit of benchmark-relative risk taken.
- A0.60Correct
- B0.96
- C1.67
- D0.10
Explanation
Information ratio = active return / tracking error = 2.4% / 4.0% = 0.60. Dividing tracking error by active return gives 1.67, which inverts the ratio. 0.96 multiplies the two figures, and 0.10 is not derived from the data.
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