What this calculator does
The information ratio measures how consistently a manager beats their benchmark. It divides excess return by tracking error, which is the volatility of that excess return, so it rewards reliable outperformance over lucky outperformance.
Consistency does most of the work. The same 2.00 per cent of excess return scores 0.667 with 3 per cent tracking error and only 0.250 with 8 per cent, because the second manager took far more deviation risk to achieve the same result.
The formula
The portfolio return is calculated from beginning and ending values, the benchmark return is subtracted, and the difference is divided by the tracking error.
| Term | Meaning |
|---|---|
| Tracking error | The standard deviation of the return difference against the benchmark. |
| Excess return | Portfolio return less benchmark return, sometimes called active return. |
| Information ratio | Excess return per unit of tracking error. |
The inputs explained
| Field | What to enter |
|---|---|
| Beginning portfolio value ($) | Portfolio value at the start of the period. |
| Ending portfolio value ($) | Portfolio value at the end of the period. |
| Benchmark return over same period (%) | The benchmark return over the same period. |
| Tracking error (std. dev. of excess return) (%) | Tracking error, the standard deviation of the excess return. |
When to use it
Assessing an active manager
The ratio is the standard measure of active management skill relative to a benchmark.
Comparing a closet indexer with a high-conviction fund
Both may show excess return, but with very different tracking error.
Setting an active risk budget
A target information ratio and tracking error together imply the excess return expected.
Worked examples
Every figure in the tables below is produced by this page’s own calculator at build time, so the numbers and the tool always agree. Select any row to load that scenario.
How does tracking error change the score?
The same excess return at three levels of tracking error.
Questions
What is a good information ratio?
Above 0.5 is generally considered good and above 1.0 excellent, which very few managers sustain over long periods. Grinold and Kahn's framework treats 0.5 as good, 0.75 as very good and 1.0 as exceptional.
How does it differ from the Sharpe ratio?
Sharpe measures excess return over the risk-free rate against total volatility. The information ratio measures excess return over a benchmark against the volatility of that excess. It is about active management specifically.
What is tracking error?
How much the portfolio return deviates from the benchmark from period to period. Index funds have very low tracking error by design; high-conviction active funds have much more.
Can a low tracking error flatter the ratio?
Yes, and it is a known issue. A fund that barely deviates from its benchmark can post a high ratio on a tiny excess return, which looks impressive but delivers very little in absolute terms.
For return above the CAPM prediction, see the Jensen's alpha calculator. For volatility-adjusted return, see the Sharpe ratio calculator.