Information Ratio
Active return per unit of tracking error. Numerator is the mean excess return over the benchmark; denominator is the standard deviation of those excess returns (the tracking error).
When to use: The standard metric for active managers. Measures how consistently a manager beats the benchmark per unit of risk taken to deviate from it. >0.5 is good, >1.0 is exceptional, sustained >0.5 over multi-year periods is rare.
Formula
Variables
| Symbol | Name | Description | Unit |
|---|---|---|---|
| IR | Information Ratio | Active return per unit of tracking error | integer |
| AssetReturns | Asset Returns | Periodic returns of the asset or portfolio being measured | % |
| BenchmarkReturns | Benchmark Returns | Periodic returns of the comparison benchmark over the same periods | % |
Real-Life Examples
Example 1: Active Equity Manager
Portfolio quarterly returns: 4%, 3%, 5%, 2%, 6%. Benchmark: 3%, 2%, 4%, 2%, 5%.
Given
Step-by-Step
IR of 1.79 — exceptional consistency. The manager beats the benchmark by ~80bps per period with very tight tracking error.
Frequently Asked Questions
Sustained IR above 0.5 is genuinely good for an active manager; above 1.0 is exceptional. Most active managers have IRs near zero (or negative after fees) over long horizons — beating the benchmark consistently is hard.
Sharpe uses the risk-free rate as the baseline; IR uses a benchmark portfolio. Sharpe answers "how good is this strategy on its own?" IR answers "how good is this strategy relative to its benchmark?" Active managers should be measured by IR, not Sharpe.
Because changing the benchmark changes the active returns and tracking error. A small-cap manager benchmarked against the S&P 500 will look different than the same manager benchmarked against the Russell 2000. Always pair IR with benchmark disclosure.