What Is Information Ratio?
The Information Ratio (IR) measures a portfolio's active return relative to a benchmark, divided by the standard deviation of that active return (called 'tracking error'). High IR means consistent outperformance; low IR means lucky or volatile outperformance.
Formula: IR = (portfolio return - benchmark return) / tracking error. An IR above 0.5 is considered good for active managers; above 1.0 is excellent; above 1.5 is rare and often unsustainable. The IR distinguishes between managers who beat the benchmark by being consistently right vs being occasionally lucky.
Where Sharpe Ratio measures return per unit of total risk (vs cash), Information Ratio measures excess return per unit of active risk (vs benchmark). For active managers benchmarked against an index, IR is the more relevant metric. For absolute-return strategies, Sharpe is more appropriate.
Related terms
- Sharpe Ratio — Risk-adjusted return — the excess return per unit of volatility.
- Sortino Ratio — Like Sharpe, but only penalizes downside volatility — better for asymmetric strategies.
- Alpha — Return earned above a benchmark, adjusted for risk — a measure of skill.
- Beta — Sensitivity of an asset's returns to overall market returns.