PM Question please, difference, somebody, between

tango_gs

Hi

Could somebody please explain difference between the Sharpe ratio and the information ratio

Thanks a million

bolligerallstar

Question 106, Schweser Exam 3, Volume 1 is a quick calc of the information ratio.

However, I'm confused by the solution relative to what I understood the IR to be.

The given variables for a forecasted portfolio are:

Alpha: 5.33%
Beta: 1.35%
Total std dev, 40%
Unsys std dev, 30%

The question asks for a calculation of the IR given those inputs.

The solution has Alpha (being active return) over Unsys std dev - not the total std dev.

Anyone assist? The definitions I have for IR suggest it is active return over the deviation of active return - which I would have interpreted to be total std dev of the portfolio.

Unless... I've missed the boat entirely on this PM concept - and active return is entirely the product of unsystematic risk?

iteracom

SMicucci Wrote:
-------------------------------------------------------
> Question 106, Schweser Exam 3, Volume 1 is a quick
> calc of the information ratio.
>
> However, I'm confused by the solution relative to
> what I understood the IR to be.
>
> The given variables for a forecasted portfolio
> are:
>
> Alpha: 5.33%
> Beta: 1.35%
> Total std dev, 40%
> Unsys std dev, 30%
>
> The question asks for a calculation of the IR
> given those inputs.
>
> The solution has Alpha (being active return) over
> Unsys std dev - not the total std dev.
>
> Anyone assist? The definitions I have for IR
> suggest it is active return over the deviation of
> active return - which I would have interpreted to
> be total std dev of the portfolio.
>
> Unless... I've missed the boat entirely on this PM
> concept - and active return is entirely the
> product of unsystematic risk?

In the denominator, you are subtracting the standard deviation of the benchmark. So, what you are calculating is excess return over excess risk. If this exceeds the Sharpe ratio of your benchmark, then it's a lucrative strategy to follow. Otherwise, it is worthless.

NO EXCUSES

wilslm

bpdulog Wrote:

>
> In the denominator, you are subtracting the
> standard deviation of the benchmark. So, what you
> are calculating is excess return over excess risk.
> If this exceeds the Sharpe ratio of your
> benchmark, then it's a lucrative strategy to
> follow. Otherwise, it is worthless.

Smicucci:

So excess risk is measured by the unsystematic deviation? On the assumption that excess returns could only be generated when markets are inefficient?

YAhmed

So the IR is simply the denominator of the Black Tynor model in PM ?

ningning1984

Correction i meant numerator