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Difficulty: Medium
Category: Brainteasers
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Topics: information-ratio, performance-measurement, risk-adjusted-return
A portfolio manager, Sarah, consistently outperforms her benchmark. Over the past 5 years, her portfolio has generated an average active return of 3% per year, with a tracking error of 5%. What is the Information Ratio of Sarah's portfolio? Remember: Information Ratio is a risk-adjusted measure of active return. It quantifies the excess return achieved relative to a benchmark, divided by the tracking error. The formula is: $$Information\ Ratio = \frac{Active\ Return}{Tracking\ Error}$$
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