Explanation:
The information ratio can be computed by comparing the residual return to the residual risk or the excess return to the tracking error. The greater the IR, the better the management is at selecting assets to invest in.
Fund A:
Fund B:
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Q.5318 An analyst examined the past performance of two commodity funds that follow the S&P500 as a benchmark. The analyst collected monthly return data and utilized the Information Ratio (IR) to evaluate which fund generated greater returns more effectively. The analyst then presented the results as follows:
| Fund A | Fund B | Benchmark | |
|---|---|---|---|
| Average monthly return | 2.63% | 2.54% | 2.35% |
| Average excess return | 0.28% | 0.19% | 0.00% |
| Standard deviation of returns | 0.51% | 0.48% | 0.45% |
| Tracking error | 0.56% | 0.53% | 0.00% |
What is the Information Ratio (IR) for each fund?
A
Fund A Information Ratio (IR) = 0.54, Fund B Information Ratio (IR) = 0.39
B
Fund A Information Ratio (IR) = 0.50, Fund B Information Ratio (IR) = 0.35
C
Fund A Information Ratio (IR) = 0.46, Fund B Information Ratio (IR) = 0.47
D
Fund A Information Ratio (IR) = 0.91, Fund B Information Ratio (IR) = 0.90
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