Explanation:

B is correct.

Year	Portfolio rate of return	Benchmark rate of return	Portfolio beta with respect to the benchmark	Excess return
1	0.072	0.070	0.92	0.002
2	0.052	0.054	0.88	-0.002
3	0.052	0.047	0.90	0.005
4	0.060	0.060	0.84	0.000
5	0.048	0.033	0.89	0.015

IR = Average excess returns / Std dev of excess returns
(IR = Alpha / Tracking error)

Average excess returns: 0.0040
Std dev of excess returns: 0.0067
IR = 0.59

A is incorrect. It is found by dividing portfolio returns by benchmark returns and then taking the standard deviation of these ratios.

C is incorrect. It is the average of betas.

D is incorrect. It is found by dividing average portfolio returns by average benchmark returns.

Question A portfolio manager at a hedge fund manages an equity portfolio that is benchmarked to an index. The information on the performance of the portfolio and the benchmark over the last 5 years is provided below:

Year Portfolio rate of return Benchmark rate of return Portfolio beta with respect to the benchmark
1 0.072 0.070 0.92
2 0.052 0.054 0.88
3 0.052 0.047 0.90
4 0.060 0.060 0.84
5 0.048 0.033 0.89

What is the approximate value of the manager’s information ratio?

Year	Portfolio rate of return	Benchmark rate of return	Portfolio beta with respect to the benchmark
1	0.072	0.070	0.92
2	0.052	0.054	0.88
3	0.052	0.047	0.90
4	0.060	0.060	0.84
5	0.048	0.033	0.89

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Last updated: July 5, 2026 at 07:28

0.20

0.60

0.90

1.08

Financial Risk Manager Part 2