Explanation:
Here is the entire table completed. First, calculate the volatilities of Alpha and Delta using the provided Sharpe ratios. They are both greater than 15%, so we discard these two portfolios. Of the remaining two portfolios that meet the volatility constraint, Charlie offers the higher information ratio:
| Fund | Return | Volatility | Tracking Error | Information Ratio | Sharpe Ratio |
|---|---|---|---|---|---|
| Alpha | 9.10% | 15.64% | 2.00% | 1.25 | 0.39 |
| Bravo | 9.10% | 14.50% | 2.40% | 1.04 | 0.42 |
| Charlie | 8.40% | 12.50% | 1.50% | 1.20 | 0.43 |
| Delta | 8.90% | 16.00% | 1.80% | 1.28 | 0.37 |
(Book 1, Module 5.3, LO 5.g)
Ultimate access to all questions.
A wealth manager is analyzing four active managers. She wants to invest with the manager with the highest information ratio, as long as that manager has an annual volatility of less than 15%. The return of the benchmark portfolio used in her analysis is 6.6% and the volatility of the benchmark is 10%. The risk-free rate is 3%. She has received the following table from a colleague. Unfortunately, some of the data is unreadable and is marked (U/R) in the following table:
| Fund | Return | Volatility | Tracking Error | Information Ratio | Sharpe Ratio |
|---|---|---|---|---|---|
| Alpha | 9.10% | U/R | 2.00% | U/R | 0.39 |
| Bravo | 9.10% | 14.50% | U/R | 1.04 | 0.42 |
| Charlie | 8.40% | 12.50% | U/R | 1.20 | 0.43 |
| Delta | 8.90% | U/R | 1.80% | U/R | 0.37 |
Based on the portfolio constraints, which fund should the manager select?
A
Alpha.
B
Bravo.
C
Charlie.
D
Delta.
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