For Fund A
The individual annual returns for the fund are: 5%, 10% and 0.6536% giving an annualised return of 5.15%, and the benchmark returns were -1%, 4%, 1% giving an annualised return for the benchmark of 1.31%.
So the relative returns were +6%, +6%, –0.346% which have a mean of 3.88%.
The tracking error is the annualised standard deviation of the relative performance of the fund against its benchmark.
So, we can calculate the tracking error as 3.66%.
The information ratio is defined in the course (Chapter 22) as relative return divided by tracking error
Therefore the information ratio is 1.06 (3.88%/3.66%)
[It was possible to use 5.15% - 1.31% = 3.84% on the top line, which gives a similar result.]
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