Answer: Information ratio

## Explanation The **Information Ratio (IR)** is the correct measure to use in this scenario because: - **IR = Active Return / Tracking Error** - It evaluates whether the portfolio manager's deviation from the benchmark has generated appropriate returns relative to the additional risk taken - A high IR indicates that the manager has successfully generated excess returns that justify the deviation risk - A low IR suggests the deviation hasn't produced sufficient returns to compensate for the additional risk ### Why other options are incorrect: **A. Tracking Error**: Only measures the standard deviation of active returns (risk of deviation), but doesn't assess whether the returns justify this risk **C. Sortino Ratio**: Focuses on downside risk specifically and doesn't measure performance relative to a benchmark **D. Jensen's Alpha**: Measures excess returns relative to CAPM expectations, but doesn't directly compare performance to a specific benchmark portfolio The Information Ratio is specifically designed to answer the question: "Has the manager's deviation from the benchmark produced returns that appropriately compensate for the additional risk taken?"

Author: Tanishq Prabhu