Definition
The information ratio evaluates how consistently a portfolio manager generates returns above the benchmark. Higher IR indicates more reliable skill. An IR above 0.5 is considered good, above 1.0 is exceptional. It is the key metric for evaluating active managers—a high IR suggests genuine stock-picking or timing ability rather than luck.
functions Formula
Information Ratio = (Rp − Rb) / Tracking Error
lightbulb Example
A fund returns 13% versus a 10% benchmark, with 4% tracking error. IR = 3%/4% = 0.75, indicating consistent outperformance. A fund with 5% excess return but 15% tracking error has IR = 0.33—less consistent alpha generation.
verified_user Key Points
- Measures consistency of active management
- IR > 0.5 is good, > 1.0 is exceptional
- Active return = portfolio return minus benchmark
- Tracking error = std dev of active returns