medium · FRM Part 2 Risk & Investment Management
A manager is evaluated using the Information Ratio (IR) for a benchmarked mandate.
If the manager's active risk (Tracking Error) contribution to the total plan increases, what is the required effect on the manager's alpha for the plan's overall IR to remain unchanged?
- The alpha must increase such that the ratio of alpha to marginal tracking error remains constant.
- The manager's Information Ratio must increase proportionally to the square of the tracking error.
- The alpha must decrease to offset the increased risk-weighted assets (RWA).
- The alpha can remain constant because tracking error diversification is owned at the plan level.
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