Information Ratio Calculator
Calculate Information Ratio by dividing active return by tracking error. Evaluate portfolio manager risk-adjusted performance relative to a benchmark with interactive charts.
About This Calculator
The Information Ratio (IR) Calculator helps investors, financial analysts, and portfolio managers evaluate the risk-adjusted performance of an actively managed portfolio relative to its benchmark. This metric is essential for determining whether a fund manager is genuinely adding value through active investment decisions or merely tracking market movements.
The Information Ratio is calculated using the formula: IR = (Portfolio Return - Benchmark Return) / Tracking Error. The numerator represents the active return generated by the portfolio manager, while the denominator captures the consistency of that outperformance. An IR above 0.5 indicates skilled active management, while a negative IR suggests the portfolio is not justifying its active management fees.
This metric is widely used alongside the Sharpe Ratio to provide a complete picture of portfolio performance. While the Sharpe Ratio compares returns against the risk-free rate, the Information Ratio specifically measures a manager ability to outperform a passive benchmark - making it particularly valuable for evaluating mutual funds, hedge funds, and pension fund managers.
Regional Notes
- India (IN): Common benchmarks include Nifty 50, Sensex, and Nifty 500. Indian mutual fund schemes are often evaluated using Information Ratio against their stated benchmark indices as per SEBI regulations. Tracking error is typically reported in monthly mutual fund factsheets.
- United States (US): Common benchmarks include S&P 500, Dow Jones, and NASDAQ. The Information Ratio is widely used in the US mutual fund and ETF industry. Morningstar and other rating agencies report Information Ratios for fund evaluation.
- United Kingdom (UK): Common benchmarks include FTSE 100, FTSE 250, and FTSE All-Share. UK fund managers are evaluated using Information Ratio against benchmark indices as part of investment trust and OEIC performance reporting under FCA guidelines.
Frequently Asked Questions
What is the Information Ratio?
The Information Ratio (IR) is a performance metric that measures a portfolio manager ability to generate excess returns relative to a benchmark, per unit of tracking error. It indicates whether the manager is adding value through active management decisions.
How is the Information Ratio calculated?
The Information Ratio is calculated by subtracting the benchmark return from the portfolio return to get the active return, then dividing that by the tracking error. The formula is: IR = (Portfolio Return - Benchmark Return) / Tracking Error.
What is a good Information Ratio?
An Information Ratio above 0.5 is considered good and indicates the portfolio manager is consistently outperforming the benchmark. A ratio between 0 and 0.5 is average, while a negative ratio suggests underperformance relative to the benchmark.
How is Information Ratio different from Sharpe Ratio?
The Sharpe Ratio compares portfolio returns to the risk-free rate and uses standard deviation of portfolio returns as risk. The Information Ratio compares portfolio returns to a benchmark index and uses tracking error (standard deviation of excess returns) as risk.
Can the Information Ratio be negative?
Yes, the Information Ratio can be negative when the portfolio return is lower than the benchmark return. This indicates the portfolio manager has underperformed the benchmark and may not be generating enough value to justify active management fees.
What inputs do I need for calculating Information Ratio?
You need three inputs: the portfolio return (percentage return of your investment portfolio), the benchmark return (percentage return of the benchmark index like S&P 500 or Nifty 50), and the tracking error (standard deviation of the difference between portfolio and benchmark returns).
What is tracking error in Information Ratio?
Tracking error is the standard deviation of the difference between portfolio returns and benchmark returns. It measures how consistently the portfolio outperforms or underperforms the benchmark. A lower tracking error indicates more consistent performance.
Is Information Ratio used globally?
Yes, the Information Ratio is used globally by institutional investors, fund managers, and financial analysts to evaluate portfolio performance. It works with any benchmark such as S&P 500 (US), FTSE 100 (UK), Nifty 50 (India), or Nikkei 225 (Japan).