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

Which measure of portfolio performance compares the excess return of a portfolio over its benchmark with the tracking error (standard deviation of that excess return)?

The information ratio is the measure. It divides the portfolio's active return over its benchmark by the tracking error, which is the standard deviation of that active return. It shows how consistently a manager adds value relative to the benchmark per unit of active risk taken.

  1. AInformation ratioCorrect
  2. BTreynor ratio
  3. CJensen's alpha
  4. DCoefficient of variation

Explanation

The information ratio equals active return (portfolio minus benchmark) divided by tracking error. Treynor uses beta, Jensen's alpha is a CAPM-based intercept, and the coefficient of variation divides standard deviation by return.

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