Information Ratio - IR

What is the 'Information Ratio - IR'

The information ratio (IR) is a ratio of portfolio returns above the returns of a benchmark (usually an index) to the volatility of those returns. The information ratio (IR) measures a portfolio manager's ability to generate excess returns relative to a benchmark, but also attempts to identify the consistency of the investor. This ratio will identify if a manager has beaten the benchmark by a lot in a few months or a little every month. The higher the IR the more consistent a manager is and consistency is an ideal trait.

Information Ratio (IR)



Rp = Return of the portfolio
Ri = Return of the index or benchmark
Sp-i = Tracking error (standard deviation of the difference between returns of the portfolio and the returns of the index)

BREAKING DOWN 'Information Ratio - IR'

A high IR can be achieved by having a high return in the portfolio, a low return of the index and a low tracking error.

For example:
Manager A might have returns of 13% and a tracking error of 8%
Manager B has returns of 8% and tracking error of 4.5%
The index has returns of -1.5%
Manager A's IR = [13-(-1.5)]/8 = 1.81
Manager B's IR = [8-(-1.5)]/4.5 = 2.11

Manager B had lower returns but a better IR. A high ratio means a manager can achieve higher returns more efficiently than one with a low ratio by taking on additional risk. Additional risk could be achieved through leveraging.

RELATED TERMS
  1. Relative Return

    The return that an asset achieves over a period of time compared ...
  2. Active Risk

    A type of risk that a fund or managed portfolio creates as it ...
  3. Investor Relations - IR

    A department, present in most medium to large public companies, ...
  4. Absolute Return

    The return that an asset achieves over a certain period of time. ...
  5. Form 2848: Power of Attorney and ...

    A tax form distributed by the Internal Revenue Service (IRS) ...
  6. Enhanced Indexing

    An investment philosophy that attempts to amplify the returns ...
Related Articles
  1. Managing Wealth

    Is Your Portfolio Beating Its Benchmark?

    Compare portfolio manager performance using the information ratio.
  2. Trading

    5 Ways To Rate Your Portfolio Manager

    Investopedia explains: These five performance ratios will help you measure how good your money manager is at increasing the value of your portfolio.
  3. ETFs & Mutual Funds

    3 Reasons Tracking Error Matters

    Discover three ways investors can use tracking error to measure performance for a mutual fund or ETF, whether indexed or actively managed.
  4. Managing Wealth

    Understanding The Sharpe Ratio

    This simple ratio will tell you how much that extra return is really worth.
  5. Managing Wealth

    Measure Your Portfolio's Performance

    Learn three ratios that will help you evaluate your investment returns.
  6. Managing Wealth

    Mitigating Downside With The Sortino Ratio

    Differentiate between good and bad volatility with the Sortino Ratio.
  7. Managing Wealth

    More Ways to Evaluate Portfolio Performance

    The Jensen measure is another tool investors use to include risk when measuring portfolio performance.
  8. ETFs & Mutual Funds

    PRHSX: T. Rowe Price Health Sciences Fund Risk Statistics Case Study

    Examine the risk metric of the T. Rowe Price Health Sciences Fund. Analyze beta, capture ratios and standard deviation to assess volatility and systematic risk.
  9. Managing Wealth

    Explaining Risk-Adjusted Return

    Risk-adjusted return is a measurement of risk for an investment or portfolio.
  10. Managing Wealth

    Does Your Investment Manager Measure Up?

    These key stats will reveal whether your advisor is a league leader or a benchwarmer.
RELATED FAQS
  1. What does the information ratio tell about the design of a mutual fund?

    Understand what the information ratio is and how to calculate it. Learn what the information ratio reveals about the design ... Read Answer >>
  2. What are the advantages and disadvantages of zero-based budgeting in accounting?

    Learn how the information ratio is calculated as a risk-adjusted measure of performance, and understand how it seeks to differentiate ... Read Answer >>
  3. What does a low information ratio tell an investor about a mutual fund?

    Understand what the information ratio is used to measure. Learn how an investor uses the information ratio to make investment ... Read Answer >>
  4. What's the difference between absolute and relative return?

    Knowing whether a fund manager or broker is doing a good job can be a challenge for some investors. It's difficult to define ... Read Answer >>
  5. What should I use as a benchmark for my small-cap stock portfolio?

    When creating a stock portfolio, it is important to have a benchmark against which you can compare your returns. Comparing ... Read Answer >>
  6. How is the expected market return determined when calculating market risk premium?

    Find out how the expected market return rate is determined when calculating market risk premium and how these figures are ... Read Answer >>
Hot Definitions
  1. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  2. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  3. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  4. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  5. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
  6. Russell 3000 Index

    A market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of ...
Trading Center