Financial Risk Manager Part 1

The information ratio is calculated as:

$\text{Information Ratio} = \frac{\text{Alpha}}{\text{Tracking Error}}$

Given:

• Alpha = 1%
• Tracking Error = 2.25%

$\text{Information Ratio} = \frac{1}{2.25} = 0.444$

The information ratio measures the excess return per unit of active risk taken by the fund manager. A ratio of 0.444 indicates that for every 1% of tracking error (active risk), the manager generates 0.444% of alpha (excess return).