Consider the following information concerning three portfolios, the market portf
ID: 2715249 • Letter: C
Question
Consider the following information concerning three portfolios, the market portfolio, and the risk-free asset:
Assume that the tracking error of Portfolio X is 10.70 percent. What is the information ratio for Portfolio X?(Negative value should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 4 decimal places.)
Portfolio Return of p Standard Deviation of p Beta of p X 15.50% 36.00% 1.35 Y 14.50 31.00 1.15 Z 7.40 21.00 .60 Market 11.70 26.00 1.00 Risk-Free 7.00 .00 .00Explanation / Answer
Information ratio of portfolio X = (R - BR) / W
Where R = Portfolio return, BR = Benchmark return and W = Standard deviation of active return also known as tracking error.
R = Portfolio return of X = 15.50%
W = tracking error = 10.70% (Given in question in last)
BR = Benchmark return (Using Capital asset pricing model calculated below.)
= Rf + Beta ( Rm - Rf ) [ Where Rf denotes risk free return & Rm denotes market return.]
= 7 + 1.35 ( 11.70 - 7)
= 7 + 1.35 * 4.7
= 13.345 %
Information ratio of portfolio X = [15.50 - 13.345 ] / 10.70
= 2.155 / 10.70
= 0.2014 (approx)
Conclusion:- Information ratio of portfolio X = 0.2014
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