It may appear that the manager has a positive alpha because his return was greater than the investor’s benchmark. However, the manager’s return is lower than the normal portfolio return so the alpha and true information ratio are negative as follows:
True active return = 14% - 16% = -2%
Misfit active return = 16% - 11% = 5%
The true active risk is backed out of the total and misfit risk:
The manager’s performance generates a true information ratio of:
True Information ratio = -2% / 3.84% = -0.52
