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

In performance evaluation, the Information Ratio of a portfolio is calculated as:

The Information Ratio equals the portfolio's excess return over its benchmark divided by tracking error, the standard deviation of that excess return. It shows how much active return a manager earns for each unit of active risk taken relative to the benchmark.

  1. APortfolio return minus risk-free return, divided by standard deviation of portfolio returns
  2. BActive return over the benchmark divided by tracking errorCorrect
  3. CPortfolio return minus risk-free return, divided by beta
  4. DPortfolio return divided by the benchmark return

Explanation

The Information Ratio measures active return (portfolio return minus benchmark return) per unit of active risk, which is tracking error. The first option describes the Sharpe ratio and the third describes the Treynor ratio. The fourth is a simple relative return and ignores risk.

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