Answer: Fund A Information Ratio (IR) = 0.50, Fund B Information Ratio (IR) = 0.35

## Explanation The Information Ratio (IR) measures the excess return per unit of active risk (tracking error). The formula is: $$\text{IR} = \frac{\text{E}(R_p - R_b)}{\text{Tracking error}}$$ Where: - $R_p$ = Portfolio return - $R_b$ = Benchmark return - Tracking error = Standard deviation of excess returns ### Fund A Calculation: $$\text{IR} = \frac{2.63\% - 2.35\%}{0.56\%} = \frac{0.28\%}{0.56\%} = 0.50$$ ### Fund B Calculation: $$\text{IR} = \frac{2.54\% - 2.35\%}{0.53\%} = \frac{0.19\%}{0.53\%} = 0.35$$ **Key Points:** - The Information Ratio evaluates how effectively a fund manager generates excess returns relative to the benchmark - A higher IR indicates better performance in selecting assets - Fund A has a higher IR (0.50) than Fund B (0.35), suggesting Fund A performed better in generating excess returns relative to its tracking error - The tracking error represents the volatility of the portfolio's returns relative to the benchmark

Author: Tanishq Prabhu