Information Ratio Calculator
Calculate the Information Ratio (IR) to measure a portfolio manager's skill in generating excess returns relative to the risk taken. IR compares active return to tracking error.
Information Ratio Results
IR Interpretation
IR > 1.0: Excellent performance
IR 0.5-1.0: Good performance
IR 0-0.5: Average performance
IR < 0: Poor performance
Note: Higher IR indicates better risk-adjusted performance
Understanding Information Ratio
The Information Ratio (IR) is a risk-adjusted performance measure that evaluates a portfolio manager's ability to generate excess returns relative to a benchmark, adjusted for the volatility of those excess returns.
Information Ratio Formula
IR is calculated as:
IR = (Portfolio Return - Benchmark Return) ÷ Tracking Error
Also expressed as: IR = Active Return ÷ Tracking Error
Components of IR
- Active Return: Portfolio return minus benchmark return
- Tracking Error: Standard deviation of active returns
- Excess Return: Return above the benchmark
- Risk-Adjusted Performance: Return per unit of risk taken
IR Interpretation
| IR Range | Performance Level | Description |
|---|---|---|
| IR > 1.0 | Excellent | Superior risk-adjusted performance |
| IR 0.75-1.0 | Very Good | Strong performance with good risk control |
| IR 0.5-0.75 | Good | Solid performance above average |
| IR 0.25-0.5 | Average | Market-average performance |
| IR 0-0.25 | Below Average | Underperforming with high risk |
| IR < 0 | Poor | Negative risk-adjusted performance |
Applications
- Portfolio Manager Evaluation: Assess skill in beating benchmarks
- Fund Selection: Compare actively managed funds
- Performance Attribution: Understand sources of excess returns
- Risk Management: Evaluate risk-adjusted performance
- Investment Strategy: Guide portfolio construction decisions
IR vs. Sharpe Ratio
While both measure risk-adjusted returns, IR focuses on active management skill relative to a benchmark, whereas Sharpe Ratio measures total portfolio performance relative to a risk-free asset.
Tip: Information Ratio is particularly useful for evaluating active portfolio managers and mutual funds. A higher IR indicates better ability to generate excess returns for the risk taken relative to the benchmark.