NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Portfolio Performance Measurement and Evaluation
A portfolio returned 12% while its benchmark returned 9%. The tracking error (standard deviation of active returns) was 4%. What is the information ratio?
The information ratio is 0.75. Active return is the portfolio return minus the benchmark return, 12% minus 9% = 3%, and dividing this by the tracking error of 4% gives 0.75, showing active return per unit of active risk.
- A0.75Correct
- B3.00
- C0.25
- D1.33
Explanation
Information ratio = active return / tracking error = (12 - 9) / 4 = 0.75. Check: 0.75 x 4 = 3. Option 1.33 inverts the ratio, and 3.00 ignores tracking error.
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