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Answer: Fund X
## Explanation **Correct Answer: A** The information ratio is calculated as: \[ IR = \frac{\text{Active Return}}{\text{Tracking Error}} \] Where Active Return = Fund Return - Benchmark Return **Calculations:** - **Fund X**: Active Return = -1.5% - (-4.5%) = 3.0% IR = 3.0% / 1.2% = 2.50 - **Fund Y**: Active Return = 3.2% - 1.8% = 1.4% IR = 1.4% / 0.8% = 1.75 - **Fund Z**: Active Return = 2.3% - (-0.9%) = 3.2% IR = 3.2% / 1.6% = 2.00 **Analysis:** - Fund X has the highest information ratio (2.50) - Fund Z has the second highest (2.00) - Fund Y has the lowest (1.75) Fund X has the most favorable information ratio because it has the highest value (2.50), indicating the best risk-adjusted performance relative to its benchmark. A higher information ratio is considered more favorable as it shows the manager is generating more active return per unit of tracking error risk taken.
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21. An analyst gathers the following information on three well-diversified funds, where the returns and tracking errors are based on a five-factor macroeconomic model:
| Fund | Fund Return | Benchmark Return | Tracking Error |
|---|---|---|---|
| X | -1.5% | -4.5% | 1.2% |
| Y | 3.2% | 1.8% | 0.8% |
| Z | 2.3% | -0.9% | 1.6% |
The fund with the most favorable information ratio is:
A
Fund X
B
Fund Y
C
Fund Z
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