Performance & risk
Information Ratio (IR)
Active return over a benchmark per unit of tracking error.
What Information Ratio Means
The information ratio evaluates how consistently a portfolio outperformed or underperformed its benchmark. Tracking error is the volatility of those return differences.
Information Ratio Formula
IR = (Rₚ − Rᵦ) ÷ tracking error
How to Read the Result
A fund beats its benchmark by 2% annually with 4% tracking error. Its information ratio is 0.50.
Limitations
- It depends on the selected benchmark.
- Smoothed pricing can understate tracking error.
- It does not reveal the source or timing of active bets.
Common Questions
How does IR differ from Sharpe?
IR uses benchmark-relative return and tracking error; Sharpe uses a risk-free rate and total volatility.
Measuring return and risk
- Profit factorDefinition
- Win rateDefinition
- Risk-reward ratioDefinition
- BetaDefinition
- AlphaDefinition