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 (IR) is a performance evaluation ratio that measures the excess return of an investment portfolio compared to a benchmark, relative to the volatility of those excess returns. It is calculated using the formula: \[ IR = \frac{E(R_p - R_b)}{Tracking\ Error} \] where \( E(R_p - R_b) \) is the average excess return of the portfolio over the benchmark, and the tracking error is the standard deviation of the difference between the portfolio's returns and the benchmark's returns. For Fund 1, the average excess return is 0.073%, and the tracking error is 0.344%. Plugging these values into the formula gives: \[ IR_{Fund\ 1} = \frac{0.00073}{0.00344} = 0.212 \] For Fund 2, the average excess return is 0.053%, and the tracking error is 0.341%. Using these values in the formula yields: \[ IR_{Fund\ 2} = \frac{0.00053}{0.00341} = 0.155 \] A higher information ratio indicates that the fund manager is better at selecting assets that outperform the benchmark, doing so with greater efficiency. Since Fund 1 has an IR of 0.212, which is higher than Fund 2's IR of 0.155, Fund 1 is considered to have performed better in terms of the information ratio. Therefore, the correct answer is: A. IR for Fund 1 = 0.212, IR for Fund 2 = 0.155; Fund 1 performed better as it has a higher IR.

Author: LeetQuiz Editorial Team