Skip to content

CMA Final · Strategic Financial Management · Portfolio Performance Evaluation and Portfolio Revision

An equity scheme managed by an Indian AMC earned 15% last year against its benchmark's 12%. The standard deviation of the scheme's active returns (tracking error) over the benchmark was 4%. The risk-free rate was 7%. What is the information ratio of the scheme?

The information ratio is 0.75. It is the active return over the benchmark, 15% minus 12% = 3%, divided by the tracking error of 4%. The risk-free rate is irrelevant here. Using it would produce a Sharpe-style figure of 2.00, which is wrong.

  1. A0.75Correct
  2. B2.00
  3. C3.75
  4. D0.25

Explanation

Information ratio = (Rp - Rbenchmark) / tracking error = (15 - 12) / 4 = 0.75. The value 2.00 comes from deducting the risk-free rate, (15 - 7)/4, which gives a Sharpe-type measure using the wrong reference. The value 3.75 is 15/4, with no deduction at all. The value 0.25 is 3/12, which divides by the wrong base.

Did you get it right without looking?

One question tells you little. A timed set on Portfolio Performance Evaluation and Portfolio Revision shows your real accuracy, how long you take and where you lose marks.

Practise Portfolio Performance Evaluation and Portfolio RevisionFree diagnostic mock

More Portfolio Performance Evaluation and Portfolio Revision questions