Answer: The manager with the lowest tracking error has the best stock-picking skills.

## Explanation When evaluating portfolio managers' stock-picking skills, tracking error is a key metric to consider. Tracking error measures the standard deviation of the difference between a portfolio's returns and its benchmark returns. ### Key Points: - **Tracking Error Definition**: Tracking error = σ(Rp - Rb), where Rp is portfolio return and Rb is benchmark return - **Stock-Picking Skills**: Good stock-picking skills should result in portfolio returns that closely track the benchmark while achieving superior performance - **Low Tracking Error**: Indicates the portfolio manager is effectively replicating the benchmark while making selective deviations for alpha generation - **High Tracking Error**: Suggests the portfolio is significantly deviating from the benchmark, which could be due to poor stock selection or excessive risk-taking ### Why Option B is Correct: Since all portfolios have the same level of risk as the benchmark, the manager with the **lowest tracking error** demonstrates the most precise stock-picking skills. This means they can achieve their investment objectives while maintaining close alignment with the benchmark, indicating superior security selection abilities. ### Why Other Options are Incorrect: - **A**: High tracking error suggests excessive deviation from the benchmark, not necessarily good stock-picking - **C**: Low information ratio indicates poor risk-adjusted excess returns relative to tracking error - **D**: Sharpe ratio measures total risk-adjusted returns, not specifically stock-picking skills relative to a benchmark Therefore, the manager with the lowest tracking error demonstrates the most refined stock-picking skills while maintaining benchmark-like risk characteristics.

Author: Tanishq Prabhu