Answer: 0.60

## Explanation The information ratio (IR) is calculated as: **IR = Average excess returns / Standard deviation of excess returns** First, we need to calculate the excess returns for each year: | Year | Portfolio Return | Benchmark Return | Beta | Excess Return | |------|------------------|------------------|------|---------------| | 1 | 0.072 | 0.070 | 0.92 | 0.072 - 0.070 = 0.002 | | 2 | 0.052 | 0.054 | 0.88 | 0.052 - 0.054 = -0.002 | | 3 | 0.052 | 0.047 | 0.90 | 0.052 - 0.047 = 0.005 | | 4 | 0.060 | 0.060 | 0.84 | 0.060 - 0.060 = 0.000 | | 5 | 0.048 | 0.033 | 0.89 | 0.048 - 0.033 = 0.015 | **Step 1: Calculate Average Excess Return** Average = (0.002 + (-0.002) + 0.005 + 0.000 + 0.015) / 5 = 0.020 / 5 = 0.004 **Step 2: Calculate Standard Deviation of Excess Returns** Variance = [(0.002-0.004)² + (-0.002-0.004)² + (0.005-0.004)² + (0.000-0.004)² + (0.015-0.004)²] / 4 = [( -0.002)² + (-0.006)² + (0.001)² + (-0.004)² + (0.011)²] / 4 = [0.000004 + 0.000036 + 0.000001 + 0.000016 + 0.000121] / 4 = 0.000178 / 4 = 0.0000445 Standard deviation = √0.0000445 = 0.00667 **Step 3: Calculate Information Ratio** IR = 0.004 / 0.00667 = 0.599 ≈ 0.60 **Why other options are incorrect:** - **A (0.20)**: This would result from incorrectly calculating the ratio of portfolio returns to benchmark returns and taking the standard deviation - **C (0.90)**: This is approximately the average of the portfolio betas (0.886) - **D (1.08)**: This would result from dividing average portfolio returns by average benchmark returns

Author: LeetQuiz .