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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Portfolio Performance Measurement and Evaluation

An adviser compares a portfolio's returns with its benchmark's returns and wants to measure the active return per unit of the standard deviation of the difference between them. Which measure is this?

This is the information ratio. It divides the portfolio's active return over its benchmark by the tracking error, which is the standard deviation of the difference between portfolio and benchmark returns. It shows how consistently a manager generates excess return per unit of active risk.

  1. AInformation ratioCorrect
  2. BSortino ratio
  3. CTreynor ratio
  4. DCoefficient of variation

Explanation

The information ratio = (Rp - Rb) / tracking error, where tracking error is the standard deviation of active returns. The Sortino ratio uses downside deviation, and the Treynor ratio uses beta.

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