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5 November, 12:31

The following data are available relating to the performance of Wildcat Fund and the market portfolio: Wildcat Market Portfolio Average return 18 % 15 % Standard deviations of returns 25 % 20 % Beta 1.25 1.00 Residual standard deviation 2 % 0 % The risk-free return during the sample period was 7%. What is the information ratio measure of performance evaluation for Wildcat Fund

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  1. 5 November, 14:25
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    50.0%

    Explanation:

    The computation of the information ratio is as follows

    Information ratio = Alpha : residual standard deviation

    where,

    Alpha is

    = Average rate of return - required rate of return

    The average rate of return is 18%

    And the required rate of return is

    = Risk-free rate + Beta * (Market rate of return - Risk-free rate)

    = 7% + 1.25 * (15% - 7%)

    = 17%

    So, the alpha is

    = 18% - 17%

    = 1%

    Therefore the information ratio is

    = 1% : 2%

    = 50.0%
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