Hi I am a bit confused about how I should be calculating the ex post information ratio. Schweser calculate is as average alpha divided by the tracking error where the tracking error is the standard deviations of the excess returns with the mean used in the standard deviation as the average alpha from the numerator. This is obviously just the standard information ratio and tracking error formula. However, I have seen it on another course that when you calculate the tracking error for the denominator of the IR ratio the mean return you use is zero because the average returns tend to zero in the long run. Obviously this gives a very different answer. Does anyone have any insight on which formula I should be using? Or if you can be tested using both methods where the question will make it clear which way you should do it? Thanks
I have only used IR = alpha/tracking error. Could you tell where exactly in the material did you find the other formula? Preferably giving the page number.
Hiya, it was actually brought up on one of my online lectures so i dont have reference it it in any of the Schweser etc reference books which is why i was confused, but I have contacted the tutor taking the lecture who is going to check again with the CAIA curriculum books and get back to me. I will update with his answer so as not to cause any confusion. Thank you
Hi - i have just been told we should use the traditional tracking error formula unless we are told to assume that in the long term the excess return nets to zero. Panic over! Thanks