CMA Final · Strategic Financial Management · Portfolio Performance Evaluation and Portfolio Revision
A portfolio returned 11% against a benchmark return of 9%. The portfolio's tracking error is 4%. What is the information ratio?
The information ratio is 0.50. Active return is the portfolio's 11% minus the benchmark's 9%, which is 2%. Dividing this by the tracking error of 4% gives 0.50, showing excess return earned per unit of active risk.
- A0.50Correct
- B2.75
- C0.25
- D2.25
Explanation
Information ratio = active return / tracking error = (11 - 9) / 4 = 0.50. Option 2.75 divides the portfolio return by tracking error, and 2.25 divides the benchmark return by it. Option 0.25 divides by 8 wrongly.
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