Question

Assume that the tracking error of Portfolio X is 13.20 percent. What is the information ratio for Portfolio X

Answer 1

The answer is below

Step-by-step explanation:

To calculate the information ratio of portfolio X, we have to first calculate the Jensen's alpha of portfolio X. The Jensen's alpha is given as:

Jensen’s Alpha = Expected Portfolio Return – [ Risk-Free Rate + Beta of the Portfolio* (Expected Market Return – Risk-Free Rate) ]

From the picture attached, the values of the data are gotten, substituting:

`\alpha_p=R_p-[R_f+B_p(R_m-R_f)]\\\\\alpha_p=13-[5+1.3(10.1-5)]=1.37=1.37\%`

Information ratio = Jensen's alpha / Tracking error = 1.37% / 13.2% = 0.1038