Dear David,
I’ve had some confusion, misunderstanding and doubts when doing 09 Level I Annotated Boot Camp. Appreciate your kind help on this!
Is information ratio equal to beta of a fund? It seems so from your answer to following practice question from “FRM09 Level1 Annotated Boot Camp” but I couldn’t understand it. Can you please explain whether and why we can get Beta = 1 = information ratio ?
Question 36:
The information ratio of the Sterole US Fund for 2006 against the S&P 500, its benchmark index, is 1. For the same time period, the fund‘s Sharpe ratio is 2, the fund has a tracking error of 7% against the S&P 500, and the standard deviation of fund returns is 5%. The risk‐ free rate in the US is 4%. Calculate the return for the S&P 500 during the time period. a. 3.5% b. 7% c. 11% d. 14%
36b. [my add] What is the fund‘s Treynor ratio? 36c. What is the fund‘s Jensen‘s alpha?
Answer: CORRECT: B
Sharpe Ratio = 2
(Fund Return - Risk Free Rate)/SD = 2
(Fund Return - 4%)/5% = 2
Fund Return = 14%
Information Ratio = 1
(Fund Return - S&P 500 Return)/ Tracking Error = 1 (14% ‐ S&P 500 Return) / 7% = 1 S&P 500 Return = 7%
36b. [my add] What is the fund’s Treynor ratio? Treynor = (14% portfolio - 4% rf)/(1 = beta) = 0.1
36c. What is the fund’s Jensen’s alpha? Alpha = 14% pr. - 4% rf. - [3% excess market return * 1.0 beta] = 7%
Thank you for your enlightenment and correction!
Cheers
Liming
16/11/09
I’ve had some confusion, misunderstanding and doubts when doing 09 Level I Annotated Boot Camp. Appreciate your kind help on this!
Is information ratio equal to beta of a fund? It seems so from your answer to following practice question from “FRM09 Level1 Annotated Boot Camp” but I couldn’t understand it. Can you please explain whether and why we can get Beta = 1 = information ratio ?
Question 36:
The information ratio of the Sterole US Fund for 2006 against the S&P 500, its benchmark index, is 1. For the same time period, the fund‘s Sharpe ratio is 2, the fund has a tracking error of 7% against the S&P 500, and the standard deviation of fund returns is 5%. The risk‐ free rate in the US is 4%. Calculate the return for the S&P 500 during the time period. a. 3.5% b. 7% c. 11% d. 14%
36b. [my add] What is the fund‘s Treynor ratio? 36c. What is the fund‘s Jensen‘s alpha?
Answer: CORRECT: B
Sharpe Ratio = 2
(Fund Return - Risk Free Rate)/SD = 2
(Fund Return - 4%)/5% = 2
Fund Return = 14%
Information Ratio = 1
(Fund Return - S&P 500 Return)/ Tracking Error = 1 (14% ‐ S&P 500 Return) / 7% = 1 S&P 500 Return = 7%
36b. [my add] What is the fund’s Treynor ratio? Treynor = (14% portfolio - 4% rf)/(1 = beta) = 0.1
36c. What is the fund’s Jensen’s alpha? Alpha = 14% pr. - 4% rf. - [3% excess market return * 1.0 beta] = 7%
Thank you for your enlightenment and correction!
Cheers
Liming
16/11/09
