1. What is 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 performance. It shows the amount of active return per unit of active risk.

2. How Does the Calculator Work?

The calculator uses the Information Ratio formula:

Where:

• \( Active\ Return \) — Portfolio return minus benchmark return (in decimal form)
• \( Tracking\ Error \) — Standard deviation of active return (in decimal form)

Explanation: A higher IR indicates better risk-adjusted performance relative to the benchmark.

3. Importance of Information Ratio

Details: The IR is crucial for evaluating investment managers as it accounts for both the excess returns generated and the risk taken to achieve those returns.

4. Using the Calculator

Tips: Enter active return and tracking error as decimals (e.g., 0.05 for 5%). Tracking error must be greater than zero.

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: While both measure risk-adjusted returns, Sharpe Ratio uses total risk (standard deviation), while IR uses only active risk (tracking error).

Q3: What time period should be used?
A: Typically calculated using monthly returns over 3-5 years for meaningful results.

Q4: Can IR be negative?
A: Yes, if the active return is negative, though the interpretation depends on the tracking error magnitude.

Q5: What are limitations of Information Ratio?
A: It assumes normal distribution of returns and can be sensitive to the benchmark chosen.