Question

You want to evaluate three mutual funds using the information ratio measure for performance evaluation. The risk-free return during the sample period is 6%, and the average return on the market portfolio is 19%. The average returns, residual standard deviations, and betas for the three funds are given below. Average Return Residual Standard Deviation Beta Fund A 20 % 4.00 % 0.8 Fund B 21 % 1.25 % 1.0 Fund C 23 % 1.20 % 1.2 The fund with the highest information ratio measure is

Answer 1

Answer:

The fund with the highest information ratio measure is Fund B.

Explanation:

From the information provided:

Definition: The information ratio measures and compares the active return of an investment compared to a benchmark index relative to the volatility of the active return.

Formula: RETURN ON THE MARKET PORTFOLIO / STANDARD DEVIATION

Let's use this formula to calculate for Fund A, Fund B and Fund C.

Fund A : (20 - 6 - 0.8) ( 19 - 6 ) / 4 = 0.9

Fund B : (21 - 6 - 1 ( 13 ) / 1.25 = 1.6

Fund C : (23 - 6 - 1.2) ( 13 ) / 1.2 = 1.167

Therefore, The fund with the highest information ratio measure is Fund B.