Information Ratio
Return above a benchmark per unit of tracking error.
Formula
Information Ratio = (Portfolio Return - Benchmark Return) / Tracking Error
Unit
ratio (x, times)
In depth
The information ratio measures the consistency of outperformance rather than its size: a manager beating the benchmark by 2% every year scores far better than one beating it by 6% and trailing by 4% alternately. It is the standard measure for active managers because it captures exactly what active management claims to deliver — reliable excess return per unit of deviation from the index. Values above 0.5 are considered good and above 1.0 rare over long periods. Like alpha it must be measured net of fees, since fees come out of the numerator.
Worked example
A fund beating its index by 3 percentage points a year with a tracking error of 4% has an information ratio of 3 / 4 = 0.75. After a 1.2% expense ratio, the numerator falls to 1.8 and the ratio to 0.45.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Information Ratio” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.