Measuring performance
Information ratio
Excess return over a benchmark, divided by tracking error — the consistency of outperformance.
How it works
Where Sharpe measures return per unit of total risk, the information ratio measures return per unit of benchmark-relative risk. It is the natural measure for an active manager.
A manager who beats the index by a modest amount very consistently scores better than one who beats it by more but erratically.
Formula
Information ratio = (portfolio return − benchmark return) ÷ tracking errorRelated terms
- Tracking errorHow much a portfolio’s returns deviate from its benchmark, measured as the volatility of the difference.
- AlphaReturn above what the risk taken would ordinarily have earned — the part attributable to skill.
- BenchmarkThe index or reference portfolio you measure yourself against, to see whether your decisions added anything.
- Active managementChoosing holdings deliberately in an attempt to beat a benchmark.
More in Measuring performance
- Look-ahead bias
- Equity risk premium
- Mark to market
- Contribution to return
- Money-weighted return
- Calmar ratio
- Nominal return
- CAGR
All 29 Measuring performance terms · The full glossary, 433 terms
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