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Homework answers / question archive / Use the following data to answer the question regarding the performance of Guardian Stock Fund and the market portfolio
Use the following data to answer the question regarding the performance of Guardian Stock Fund and the market portfolio. The risk-free return during the sample period was 5%.
Guardian Market Portfolio
Average return 14% 10%
Standard deviation of returns 26% 21%
Beta 1.2 1
Residual standard deviation 4% 0%
Calculate the information ratio measure of performance for Guardian Stock Fund. (Round your answer to 2 decimal places. Do not round intermediate calculations.)
Computation of the information ratio:-
Required return on Guardian stock = Risk free rate + Beta * (Market return - Risk free rate)
= 5% + 1.2 * (10% - 5%)
= 5% + (1.2 * 5%)
= 5% + 6%
= 11%
Information ratio = (Expected return on Guardian stock - Required return on Guardian stock ) / Residual standard deviation
= (14% - 11%) / 4%
= 3% / 4%
= 0.75
