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. 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.  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

Information ratio = α_P/σ(e_P); A: α_P = 20 - 6 - .8(19 - 6) = 3.6; 3.6/4 = 0.9; B: α_P = 21 - 6 - 1(19 - 6) = 2.0; 2/1.25 = 1.6; C: α_P = 23 - 6 - 1.2(19 - 6) = 1.4; 1.4/1.20 = 1.17.

You Want to Evaluate Three Mutual Funds Using the Information