FRM Part II · FRM Exam Part II · Portfolio Performance Evaluation
A portfolio manager earns an annual return of 9.0% against a benchmark return of 7.5%. The standard deviation of the monthly-annualized active returns (portfolio minus benchmark) is 3.0%. What is the information ratio?
The information ratio is 0.50. It equals the active return of 1.5 percent (9.0 minus 7.5) divided by the tracking error of 3.0 percent, which is the standard deviation of active returns relative to the benchmark.
- A0.30
- B0.50Correct
- C1.50
- D3.00
Explanation
Active return = 9.0% - 7.5% = 1.5%. Tracking error is the standard deviation of active returns = 3.0%. IR = 1.5/3.0 = 0.50. Dividing by 1.5 instead of the tracking error or using the wrong ratio gives other values; 0.30 would come from dividing by 5.0%.
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