Information Ratio
Information Ratio measures active return per unit of active risk, commonly (Portfolio − Benchmark) ÷ Tracking Error.
Allocator relevance: High — core metric for benchmark-aware mandates, testing whether excess returns are earned efficiently.
Expanded Definition
Information Ratio evaluates how consistently a manager generates returns relative to a benchmark, scaled by tracking error (active volatility). It is sensitive to benchmark choice, time period, and stability of the manager’s process. Allocators treat benchmark integrity as central: a mismatched benchmark can manufacture a high Information Ratio without genuine skill.
Decision Authority & Governance
Governance includes benchmark policy, style drift controls, consistent time windows, and transparent calculation notes. Allocators expect managers to disclose benchmark rationale, show multi-period IR, and avoid cherry-picked intervals.
Common Misconceptions
- High IR means low risk overall.
- Any benchmark is acceptable.
- IR is stable across regimes.
Key Takeaways
- Information Ratio is skill efficiency relative to a benchmark.
- Benchmark choice determines whether IR is meaningful.
- Use alongside drawdown and qualitative diligence.