CMA Final · Strategic Financial Management · Portfolio Performance Evaluation and Portfolio Revision
An equity fund earned 14% in a year while its benchmark index returned 11%. The annualised tracking error (standard deviation of the active return) of the fund was 6%. What is the fund's Information Ratio?
The Information Ratio is 0.50. It is the active return over the benchmark, 3 percentage points (14% less 11%), divided by the tracking error of 6%. It measures excess return earned per unit of active risk taken against the benchmark.
- A0.25
- B0.50Correct
- C0.75
- D2.00
Explanation
Active return = 14% - 11% = 3%. Information Ratio = active return / tracking error = 3 / 6 = 0.50. The value 2.00 results from inverting the ratio, which is a mistake.
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