1. What is the Information Ratio?

The Information Ratio (IR) measures a portfolio manager's ability to generate excess returns relative to a benchmark, but also considers the consistency of the performance. It shows the excess return per unit of risk taken relative to the benchmark.

2. How Does the Calculator Work?

The calculator uses the Information Ratio formula:

Where:

• \( Return \) — Portfolio return (decimal)
• \( Benchmark \) — Benchmark return (decimal)
• \( Tracking\ Error \) — Standard deviation of excess returns (decimal)

Explanation: The numerator represents the active return (portfolio return minus benchmark return), while the denominator represents the risk taken to achieve that active return.

3. Importance of Information Ratio

Details: The Information Ratio is crucial for evaluating investment managers. A higher IR indicates better risk-adjusted performance relative to the benchmark. It helps investors compare managers who follow similar strategies.

4. Using the Calculator

Tips: Enter all values as decimals (e.g., 0.08 for 8%). Tracking error must be greater than zero. The result is unitless - higher values indicate better risk-adjusted performance.

5. Frequently Asked Questions (FAQ)

Q1: What is a good Information Ratio?
A: Generally, an IR of 0.40-0.60 is considered good, 0.61-1.00 is very good, and above 1.00 is excellent.

Q2: How is Information Ratio different from Sharpe Ratio?
A: Sharpe Ratio compares returns to risk-free rate, while IR compares to a benchmark. Both measure risk-adjusted returns but with different references.

Q3: Can IR be negative?
A: Yes, if the portfolio underperforms the benchmark. A negative IR indicates poor risk-adjusted performance.

Q4: What time period should be used?
A: Typically calculated using annualized returns and tracking error over 3-5 years for meaningful results.

Q5: What are limitations of IR?
A: It assumes normal distribution of returns and doesn't account for tail risk. Also sensitive to the choice of benchmark.