FRM Part II · FRM Exam Part II · Portfolio Performance Evaluation
A portfolio manager earns an annual active return of 1.8% over her benchmark. The standard deviation of the portfolio's active returns (tracking error) is 4.5% per year. What is the portfolio's information ratio?
The information ratio is the active return divided by tracking error. With 1.8% active return and 4.5% tracking error, the ratio is 0.40, meaning 0.40 units of excess return per unit of benchmark-relative risk.
- A0.25
- B0.40Correct
- C2.50
- D0.81
Explanation
Information ratio = active return / tracking error = 1.8% / 4.5% = 0.40. Option 0.25 would result from the inverse-type error of using a wrong base, and 2.50 inverts the ratio (4.5/1.8). 0.81 results from multiplying instead of dividing (1.8 x 4.5/10).
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