Understanding the Information Ratio

Very Easy Performance Evaluation Performance Appraisal

In the context of portfolio performance evaluation, investors often seek to assess the effectiveness of a portfolio manager's investment strategies. One key metric used for evaluating performance is the information ratio, which measures a portfolio manager's ability to generate excess returns relative to a benchmark while considering the risk taken.

Which of the following statements best describes the information ratio?

The information ratio compares the total return of a portfolio against its benchmark.

The information ratio measures the excess return per unit of risk taken, specifically focusing on active management.

The information ratio indicates the diversification level of a portfolio relative to the benchmark.

Hint

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