Information Ratio

Return Metrics
Updated Apr 2026 • Has calculator

Measures how consistently a fund generates active return above its benchmark per unit of active risk (tracking error).

What is Information Ratio?

The Information Ratio (IR) is the ratio of active return (portfolio return minus benchmark return) to tracking error (the standard deviation of active returns). It answers the question: how much alpha does a manager generate per unit of active risk taken? An IR above 0.50 is generally considered good; above 1.0 is excellent and difficult to sustain. Unlike the Sharpe ratio, which evaluates a portfolio in isolation, the IR explicitly measures skill relative to a benchmark. A manager who consistently beats the benchmark by a small, stable margin can achieve a higher IR than one who occasionally posts a large outperformance but with erratic active risk. It is the most widely used metric for evaluating active manager skill in institutional portfolio management.

Formula

IR = (Rp − Rb) / Tracking Error

Worked Example

Worked example — Hypothetical Active Large-Cap Fund

5-Year Rolling Period 2019–2023

Step 1  Fund annualised return: 13.80%
Step 2  S&P 500 annualised return: 11.25%
Step 3  Active return: 13.80% − 11.25% = 2.55%
Step 4  Tracking error (std dev of yearly active returns): 4.20%
Step 5  IR = 2.55% / 4.20% = 0.61
Step 6  → IR of 0.61 is above 0.50 — consistent, skill-driven outperformance

Source: CFA Institute — Portfolio Management, 7th ed. (2024-01-01)

Calculate Information Ratio

Annualised portfolio return

Annualised benchmark (e.g. S&P 500) return

Standard deviation of (portfolio return − benchmark return) over the period

Information Ratio

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Not investment advice.

How to Interpret Information Ratio

< 0
Negative — active return is below benchmark; destroys value
0 – 0.5
0–0.5: Below average — modest active skill, may be noise
0.5 – 1
0.5–1.0: Good — consistent outperformance above benchmark
> 1
Above 1.0: Excellent — top-quartile active management skill

📚 Portfolio Performance — Complete the path

  1. Sharpe Ratio
  2. Sortino Ratio
  3. Treynor Ratio
  4. Jensen's Alpha
  5. Information Ratio
Sources
  1. CFA Institute — Portfolio Management, 7th ed., Ch. 7
  2. Investopedia — Information Ratio