Information ratio = Active return / Tracking error
Image: Peter Trimming, CC BY-SA 2.0, via Wikimedia Commons
Information ratio
Information ratio = Active return / Tracking error
The information ratio is a performance metric that compares an investment's active return to its tracking error relative to a benchmark. It quantifies the additional return an investor receives for each unit of risk taken compared to the benchmark.
Example
If a mutual fund has an active return of 5% and a tracking error of 2%, its information ratio would be 2.5 (5% / 2%).
Understanding the information ratio helps investors evaluate the skill of fund managers and the efficiency of their risk-taking strategies.
Related concepts
Treynor ratio
Treynor ratio measures excess return per unit of systematic risk
Cronbach's alpha
Cronbach's alpha (α) measures internal consistency
Bias ratio
Bias ratio detects valuation bias in asset pricing
Recency bias
Recency bias overvalues recent events in decision-making
Sharpe ratio
Sharpe ratio measures excess return per unit of risk: (R - Rf) / σ
Financial market efficiency
Market efficiency measures how quickly prices reflect available information
Educational content, not financial advice.
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