Explanation:
The tracking error is a measure of how much a fund manager's excess returns deviate over a benchmark index. It is calculated as the standard deviation of the excess returns. A large tracking error indicates a large variability of the excess return over the benchmark. In this case, Fund Manager 2 has a tracking error of 34%, which is higher than Fund Manager 1’s tracking error of 25%. Therefore, Fund Manager 2 deviated more from the benchmark index.
Choice A is incorrect. The tracking error of Fund Manager 1 is less than that of Fund Manager 2, indicating that Fund Manager 1 deviated less from the benchmark index compared to Fund Manager 2.
Choice C is incorrect. The alpha (excess return) generated by Fund Manager 1 is lower than that of Fund Manager 2, indicating that the latter has generated a higher excess return.
Choice D is incorrect. The information ratio for manager 1 (i.e., $2.35 / 25 = 0.0943` / 34 = 0.0882$).
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Q.2411 The performance parameters of two fund managers (measured against the same benchmark) in an investment firm is shown in the table below:
| Parameter | Fund Manager 1 | Fund Manager 2 |
|---|---|---|
| Return | 12.35% | 13.00% |
| 2.35% | 3.00% | |
| Tracking error | 25% | 34% |
Which of the following statements is correct?
A
Fund manager 1 deviated more from the benchmark index.
B
Fund manager 2 deviated more from the benchmark index.
C
Fund manager 1 generated a higher excess return.
D
Fund manager 2 has a higher information ratio.