Question from KS: Which performance measure would you choose if you want to consider the impact of both market-related variability of returns and the variability of active management?
A) Sharpe ratio
B) Treynor ratio
C) Information ratio
Answer: A
- Explanation given: The request covers total variability of return and that is measured by standard deviation. Standard deviation includes the impact of market-related (beta) and active management-related (alpha) variability of return. Treynor considers only beta risk while the information ratio considers only alpha-related risk.
Information ratio is active return over active risk implying it considers the difference in standard deviation values (which includes the the impact of beta) so this explanation saying IR only considers alpha related risk isn’t making sense to me.