Information Ratio
A measure of a manager's ability to earn excess returns without incurring additional risk. The information ratio assesses the consistency and efficiency of alpha generation.
A manager who consistently adds 2% above benchmark with low variability has a higher information ratio than one who adds the same average return with high volatility. An information ratio above 0.5 is generally considered good; above 1.0 is exceptional.
Formula: Information Ratio = Excess Return / Tracking Error
The information ratio is particularly useful for comparing active managers within the same asset class, as it normalizes for both the magnitude and consistency of outperformance. A high information ratio indicates a manager who delivers reliable alpha — the most valuable type of active management.
Frequently Asked Questions
What is the information ratio?
The information ratio measures a manager's ability to earn consistent excess returns relative to the risk taken. It equals excess return divided by tracking error. Above 0.5 is good; above 1.0 is exceptional.
How does the information ratio differ from the Sharpe ratio?
The Sharpe ratio measures total return relative to total risk. The information ratio measures excess return (above benchmark) relative to tracking error (deviation from benchmark), making it more specific to active management skill.
Why is the information ratio important for manager selection?
It identifies managers who generate reliable, consistent alpha — the most valuable type of active management. High variability alpha is less useful for portfolio planning than consistent alpha.
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