CA Final · Advanced Financial Management · Mutual Funds
A scheme earned 12% against its benchmark's 10%. The scheme's beta is 1.0 and its tracking error (standard deviation of active returns) is 4%. What is the information ratio?
The information ratio is 0.50. It equals the active return over the benchmark, 12% minus 10% equals 2%, divided by tracking error of 4%. It shows the excess return earned per unit of active risk taken relative to the benchmark.
- A0.50Correct
- B0.30
- C3.00
- D2.00
Explanation
Information ratio = active return / tracking error = (12 - 10)/4 = 0.50. Option 2.00 inverts the ratio, and option 3.00 uses 12/4 without deducting the benchmark.
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