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Answer: IR for Fund 1 = 0.212, IR for Fund 2 = 0.155; Fund 1 performed better as it has a higher IR.
The information ratio may be calculated by either a comparison of the residual return to residual risk or the excess return to tracking error. The higher the IR, the better 'informed' the manager is at picking assets to invest in. Since neither residual return nor risk is given, only the latter is an option. IR = E(Rp - Ro)/Tracking Error For Fund 1: IR = 0.00073/0.00344 = 0.212; For Fund 2: IR = 0.00053/0.00341 = 0.155
Author: LeetQuiz Editorial Team
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An analyst is analyzing the historical performance of two commodity funds tracking the Reuters/Jefferies-CRB® Index as benchmark. The analyst collated the data on the monthly returns and decided to use the information ratio (IR) to assess which fund achieved higher returns more efficiently, and presented the findings as shown below:
| Fund 1 | Fund 2 | Benchmark Returns | |
|---|---|---|---|
| Average monthly return | 1.488% | 1.468% | 1.415% |
| Average excess return | 0.073% | 0.053% | 0.000% |
| Standard deviation of returns | 0.294% | 0.237% | 0.238% |
| Tracking error | 0.344% | 0.341% | 0.000% |
What is the information ratio for each fund, and what conclusion can be drawn?
A
IR for Fund 1 = 0.212, IR for Fund 2 = 0.155; Fund 1 performed better as it has a higher IR.
B
IR for Fund 1 = 0.212, IR for Fund 2 = 0.155; Fund 2 performed better as it has a lower IR
C
IR for Fund 1 = 0.248, IR for Fund 2 = 0.224; Fund 1 performed better as it has a higher IR.
D
IR for Fund 1 = 0.248, IR for Fund 2 = 0.224; Fund 2 performed better as it has a lower IR.
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