FRM Part II · FRM Exam Part II · Portfolio Construction
A portfolio manager reports an annualized active return of 3.0% against the benchmark with an annualized tracking error of 4.0%. What is the information ratio?
The information ratio is active return divided by tracking error, so 3.0% divided by 4.0% gives 0.75. It measures active return earned per unit of active risk taken relative to the benchmark.
- A0.75Correct
- B1.33
- C0.12
- D1.20
Explanation
Information ratio = active return / tracking error = 3.0% / 4.0% = 0.75. The 1.33 option inverts the ratio. The 0.12 option multiplies the two figures (3 x 4 = 12, shown as 0.12) instead of dividing. The 1.20 option does not follow from any valid use of the data.
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