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. $\begin{array}{cc}
&\text {Average ReturnResidual } &\text { Standard Deviation }&\text { Beta }\
\text { Fund A } &20\%&4.00\%&0.8\
\text {Fund B } &21\%&1.025\%&1.0\
\text { Fund C} &23\%&1.20\%&1.2\
\end{array}$
The fund with the highest information ratio measure is
A) Fund A.
B) Fund B.
C) Fund C.
D) Funds A and B (tied for highest).
E) Funds A and C (tied for highest).

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. $\begin{array}{cc}
  &\text {Average ReturnResidual   } &\text { Standard Deviation  }&\text { Beta }\
 \text { Fund A } &20\%&4.00\%&0.8\
 \text {Fund B  } &21\%&1.025\%&1.0\
 \text { Fund C} &23\%&1.20\%&1.2\
\end{array}$
 The fund with the highest information ratio measure is
A) Fund A.
B) Fund B.
C) Fund C.
D) Funds A and B (tied for highest).
E) Funds A and C (tied for highest).

Quizplus · Accepted Answer

The information ratio is calculated as the difference between the return of the investment and the return of a benchmark (in this case, the risk-free rate), divided by the residual standard deviation. For each fund:- Fund A: $(20\% - 6\%)/4.00\% = 3.5$- Fund B: $(21\% - 6\%)/1.025\% = 14.63$- Fund C: $(23\% - 6\%)/1.20\% = 14.17$Fund B has the highest information ratio, indicating the best risk-adjusted performance relative to its benchmark.

You Want to Evaluate Three Mutual Funds Using the Information