Question

The Layton Growth Fund has an alpha of 1.6 percent. You have determined that Layton’s information ratio is 0.25. What must Layton’s tracking error be relative to its benchmark? (Enter your answer as a percent rounded to 2 decimal places.)

Tracking error ________%

Answer 1

Using the the formula of information ratio,

Information ratio is the risk adjusted return of a portfolio

Information ratio or appraisal ratio = Expected active return/tracking error = E(R_p - R_b)/sigma

where Rp is the portofil return, Rb is the benchmark return and E(R_p - R_b) = alpha = expected active return, sigma = tracking error

Using the same formula, Tracking error(sigma) = Expected active return/Information ratio = alpha/IR = 1.6%/0.25 = 6.4%

Answer: 6.4%