Under SEBI circulars, what is the mandatory financial metric that AMCs must disclose daily on their websites to measure risk-adjusted excess returns relative to the Tier-1 benchmark, and how is it calculated?

[ A ]Information Ratio (IR) = (Portfolio Return - Benchmark Return) / Standard Deviation of Excess Return (Tracking Error)[ CORRECT ]

[ B ]Price-to-Earnings Ratio = Market Price per Share / Earnings Per Share

[ C ]Portfolio Turnover Ratio = Total Equity Sales / Scheme Face Value

[ D ]Gross Dividend Yield = Total Dividend Declared / Number of Bank Branches

Takeaway

Option A is correct: Information Ratio (IR) = (Portfolio Return - Benchmark Return) / Standard Deviation of Excess Return (Tracking Error)

Derivation

SEBI mandated that Asset Management Companies must prominently disclose the Information Ratio (IR) on their websites and the AMFI website on a daily basis. Information Ratio is the ONLY mandatory risk-adjusted performance metric. It is calculated as: IR = (Portfolio Return - Benchmark Return) / Standard Deviation of Excess Return. For this calculation, the Tier-1 benchmark must be used, and standard deviation of daily excess returns (tracking error) forms the denominator. A high IR reflects consistent manager skill. This tests recent SEBI disclosure circulars. The common error is confusing IR with Sharpe Ratio.

Why the others fail

B — Price-to-Earnings Ratio = Market Price per Share / Earnings Per Share

Price-to-Earnings ratio is a stock valuation metric, not a portfolio risk-adjusted performance ratio disclosed under this circular.

C — Portfolio Turnover Ratio = Total Equity Sales / Scheme Face Value

Portfolio Turnover measures trading churn, not risk-adjusted excess returns relative to a benchmark.

D — Gross Dividend Yield = Total Dividend Declared / Number of Bank Branches

Gross dividend yield measures income payouts, completely unrelated to standard deviation of excess returns.