CALCULATIONS

Question 1

Tell me how to calculate the 3 main information ratios

Answer 1

Alpha =
Calculate ‘expected return’ using CAPM formula, then deduct this from the actual return
Expected return = (Risky* x Beta) + Risk free.
Risky = market return - risk free

Information ratio =
(Portfolio return - bench mark return) divided by tracking error

Sharpe ratio =
(Return on investment - risk free return) divided by standard deviation