FRM Part II · FRM Exam Part II · Portfolio Construction
A portfolio manager reports an annualized alpha of 2.4% with annualized residual (active) risk of 4.0% relative to the benchmark. What is the information ratio?
The information ratio is alpha divided by active (residual) risk. With alpha of 2.4% and residual risk of 4.0%, the ratio is 0.60. It measures the excess return earned per unit of active risk taken relative to the benchmark.
- A0.60Correct
- B1.67
- C0.96
- D0.24
Explanation
The information ratio equals alpha divided by residual risk: 2.4% / 4.0% = 0.60. The option 1.67 inverts the ratio (4.0/2.4). The option 0.96 multiplies the two figures (2.4 x 4.0 / 10), which has no meaning.
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