NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Portfolio Performance Measurement and Evaluation
Caselet: Ms. Kapoor holds a diversified equity portfolio. Her portfolio returned 11% while its benchmark index returned 9%. The portfolio's beta relative to the benchmark is 1.0 and the tracking error (standard deviation of active return) is 4%. What is the information ratio?
The information ratio is 0.50. The portfolio beat its benchmark by 2 percentage points, and the tracking error is 4%. Dividing the active return by the tracking error gives 0.50, showing the excess return earned per unit of active risk.
- A0.50Correct
- B2.75
- C0.18
- D0.82
Explanation
Active return = 11 - 9 = 2%. Information ratio = active return / tracking error = 2/4 = 0.50. Dividing 11 by 4 gives 2.75, using raw return and ignoring the benchmark. 0.18 divides 2 by 11, using the wrong denominator.
Did you get it right without looking?
One question tells you little. A timed set on Portfolio Performance Measurement and Evaluation shows your real accuracy, how long you take and where you lose marks.
More Portfolio Performance Measurement and Evaluation questions
- A portfolio returned 12% while its benchmark returned 9%. The tracking error (standard deviation of active returns) was 4%. What is the info…
- Which statement about the Treynor ratio is correct?
- A portfolio earned 14% in a year when the risk-free rate was 6%. Its standard deviation was 16% and beta was 1.25. What is its Treynor ratio…
- A portfolio manager's portfolio returned 14% in a year. The risk-free rate was 6%, and the portfolio's standard deviation was 16%. What is t…
- In performance measurement, the 'time-weighted rate of return' (TWRR) is preferred for evaluating a portfolio manager mainly because it:
- In performance measurement, the Treynor ratio of a portfolio is calculated as the excess return over the risk-free rate divided by which mea…