Chartered Investment Manager (CIM) Practice Exam · Question
When calculating the 'information ratio' for a portfolio, what does the denominator represent?
The Information Ratio measures the portfolio's excess return (alpha) per unit of tracking error (the standard deviation of the difference between portfolio retu
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Question: When calculating the 'information ratio' for a portfolio, what does the denominator represent?
Answer options:
- The portfolio's total standard deviation. ✅ The standard deviation of the portfolio's excess returns (tracking error).
- The risk-free rate.
- The market's standard deviation.
Correct answer: The standard deviation of the portfolio's excess returns (tracking error).
Explanation: The Information Ratio measures the portfolio's excess return (alpha) per unit of tracking error (the standard deviation of the difference between portfolio returns and benchmark returns). It assesses a manager's ability to generate active return relative to the risk taken.
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