9. Regarding his remarks about the information ratio, Peterson is least likely correct with
respect to:
A. I.
B. II.
C. III.
The following information relates to questions 10 - 12.
Bill White, senior investment officer at Black Stone Investments is conducting a training session
of the new analysts hired by the firm. He asks one of the participants, Craig David, to explain the
difference between the Sharpe ratio and the information ratio as both are useful tools in
evaluating portfolio managers.
David states, "The information ratio provides benchmark relative expected or realized reward-to-
risk measure, whereas the Sharpe ratio gives an absolute expected or realized reward-to-risk
measure. Sharpe ratios helps understand the value added by the portfolio return in excess of the
benchmark return for assuming the risk of the portfolio. Although the Sharpe ratio is not affected
by the addition of cash or leverage, the information ratio typically shrinks with the addition of
either."
White then explains the Fundamental Law of Active Management to her analysts and asks them
if they could interpret the correlation triangle. One of the analysts, Ariana Miller notes, "A
manager adds value if his forecasts correspond at least somewhat loosely to the realized active
Finally, White gives an example of the application of the Fundamental Law of Active
Management by evaluating the performance of Shenzua Investment Management Company.
White states, "Shenzua may be overstating its expected active return, because it rebalances
frequently, and alleges that its number of independent decisions is high. Some of Shenzua’s
funds are invested in economic regions where the same general analysis applies to all securities
within that region. That would mean that breadth is lower than stated. Furthermore, Shenzua
follows investment strategies for security selection that are not changed for several months. It
does not evaluate each security independently, therefore, the investment decisions are not
independent. This would again result in a lower breadth."
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