Information Ratio
The information ratio is a measure of the active return on an investment portfolio relative to the volatility of that return. It is used to compare the performance of a portfolio manager to a benchmark index. The higher the information ratio, the better the portfolio manager has performed relative to the benchmark. The information ratio is calculated by dividing the portfolio’s excess return over the benchmark by the portfolio’s tracking error.
History of the Term
The information ratio was first introduced in the 1970s by William Sharpe, a Nobel Prize-winning economist. Sharpe’s original definition of the information ratio was the ratio of the portfolio’s alpha to its standard deviation. Alpha is a measure of the portfolio’s excess return over the benchmark, and the standard deviation is a measure of the portfolio’s volatility. The information ratio is now widely used by investors and portfolio managers to measure the performance of a portfolio relative to a benchmark.
Comparison Table
| Portfolio | Excess Return | Tracking Error | Information Ratio |
|---|---|---|---|
| Portfolio A | 2.5% | 2.0% | 1.25 |
| Portfolio B | 3.0% | 2.5% | 1.20 |
Summary
The information ratio is a measure of the active return on an investment portfolio relative to the volatility of that return. It is used to compare the performance of a portfolio manager to a benchmark index. The higher the information ratio, the better the portfolio manager has performed relative to the benchmark. For more information about the information ratio, investors and portfolio managers can visit websites such as Investopedia, Morningstar, and Bloomberg.
See Also
- Alpha
- Sharpe Ratio
- Tracking Error
- Standard Deviation
- Risk-Adjusted Return
- Treynor Ratio
- Jensen’s Alpha
- Beta
- Sortino Ratio
- Sharpe-Lintner CAPM
