Information Ratio Calculator
Use this Information Ratio Calculator to measure how much excess return a portfolio generated compared with a benchmark for each unit of tracking error. Enter the beginning and ending portfolio values, benchmark return, and tracking error to calculate portfolio return, active return, and information ratio.
Table of contents
Use the Information Ratio Calculator
Enter the beginning portfolio value and ending portfolio value to calculate portfolio return. Then enter the benchmark return and tracking error. The calculator will calculate the information ratio, active return, portfolio return, and portfolio gain or loss.
A portfolio return of 12.0000%, benchmark return of 8.0000%, and tracking error of 4.0000% gives an information ratio of 1.0000.
This calculator is educational. Information ratio depends heavily on the chosen benchmark and tracking error estimate. It does not include fees, taxes, cash flows, timing differences, currency effects, or risk changes unless those are already reflected in your inputs.
Quick answer
The information ratio measures excess portfolio return relative to benchmark return per unit of tracking error. It is mainly used to evaluate whether active portfolio management produced enough excess return to justify the active risk taken against the benchmark.
In this formula, \( R_p \) is portfolio return, \( R_b \) is benchmark return, and \( TE \) is tracking error.
What is the information ratio?
The information ratio, often written as \( IR \), is a portfolio performance measure that compares a portfolio’s excess return against a benchmark with the amount of active risk taken to achieve that excess return. It answers an important investment question: how much additional return did the portfolio generate for each unit of tracking error?
In simple terms, the information ratio is a risk-adjusted measure of active management skill. If a portfolio manager outperforms the benchmark by \( 4\% \) and takes \( 4\% \) tracking error, the information ratio is \( 1.0 \). If another manager outperforms by the same \( 4\% \) but takes \( 8\% \) tracking error, the information ratio is only \( 0.5 \). The first manager generated the same excess return with less benchmark-relative risk.
The benchmark is central to the meaning of the information ratio. A portfolio’s return does not exist in isolation. If an equity fund returns \( 12\% \), that may sound strong. But if the benchmark returned \( 15\% \), the portfolio actually underperformed. If the benchmark returned \( 8\% \), the portfolio outperformed by \( 4\% \). The information ratio focuses on this active return, not just the absolute return.
Tracking error measures how much the portfolio’s return tends to differ from the benchmark’s return. A low tracking error means the portfolio behaves similarly to the benchmark. A high tracking error means the portfolio deviates more from the benchmark. Active managers often take tracking error intentionally because they are trying to beat the benchmark. However, taking active risk is only valuable if the manager is compensated with enough active return.
The information ratio is commonly used in portfolio management, fund comparison, institutional investment analysis, manager selection, performance attribution, and active strategy evaluation. It is especially useful when comparing managers who follow the same benchmark or investment universe. It is less useful when the benchmark is poorly chosen or when the portfolio’s objective is not benchmark-relative.
Information ratio formula
The standard information ratio formula is:
Where:
- \( IR \) = information ratio.
- \( R_p \) = portfolio return.
- \( R_b \) = benchmark return.
- \( TE \) = tracking error, usually measured as the standard deviation of active returns.
The numerator \( R_p - R_b \) is called active return or excess return over the benchmark:
If portfolio return is calculated from beginning and ending values, the portfolio return formula is:
Where \( V_0 \) is the beginning portfolio value and \( V_1 \) is the ending portfolio value. To express the return as a percentage, multiply by \( 100 \):
Tracking error is often calculated from a series of active returns. If \( AR_i \) is the active return in period \( i \), then tracking error is commonly measured as the standard deviation of those active returns:
This calculator assumes tracking error is already known and entered as a percentage. For example, if the tracking error is \( 4\% \), enter \( 4 \). The calculator converts percentages into decimals internally, so \( 12\% \), \( 8\% \), and \( 4\% \) are treated as \( 0.12 \), \( 0.08 \), and \( 0.04 \).
How to calculate information ratio
To calculate the information ratio, you need three inputs: portfolio return, benchmark return, and tracking error. The portfolio return measures how the portfolio performed. The benchmark return measures how the relevant comparison index or benchmark performed. The tracking error measures how much the portfolio’s active return fluctuated relative to the benchmark.
- Calculate portfolio return. If using beginning and ending values, calculate \( R_p = \frac{V_1 - V_0}{V_0} \).
- Enter the benchmark return. Use the return of the benchmark that matches the portfolio’s investment objective.
- Calculate active return. Subtract benchmark return from portfolio return: \( R_p - R_b \).
- Enter tracking error. Use the standard deviation of active returns, or the tracking error supplied by your analysis system.
- Divide active return by tracking error. The result is the information ratio.
- Interpret the result carefully. A higher information ratio usually indicates better active return per unit of active risk, assuming the benchmark and data are appropriate.
The calculator above can compute portfolio return from beginning and ending portfolio values, or you can switch to manual mode and enter portfolio return directly. Manual mode is useful when the portfolio return already includes cash flows, dividends, fees, or time-weighted return adjustments. Value-based mode is simpler and works best when there are no external cash flows during the period.
Tracking error cannot be zero in the information ratio formula. If tracking error is zero, the denominator is zero and the ratio is not mathematically defined. A portfolio that perfectly tracks the benchmark has no active risk, so a standard information ratio calculation cannot divide by zero. The calculator will show an error if tracking error is zero or invalid.
Worked examples
Example 1: Basic information ratio
Suppose a portfolio returns \( 12\% \), the benchmark returns \( 8\% \), and tracking error is \( 4\% \). The active return is:
Now calculate the information ratio:
The information ratio is \( 1.00 \). This means the portfolio generated one unit of active return for each unit of tracking error.
Example 2: Same active return with higher tracking error
Suppose Portfolio A and Portfolio B both beat their benchmark by \( 4\% \). Portfolio A has tracking error of \( 4\% \). Portfolio B has tracking error of \( 8\% \).
Both portfolios have the same active return, but Portfolio A has the higher information ratio because it achieved the active return with less benchmark-relative risk.
Example 3: Negative information ratio
Suppose a portfolio returns \( 6\% \), the benchmark returns \( 9\% \), and tracking error is \( 5\% \). The active return is:
The information ratio is:
A negative information ratio means the portfolio underperformed the benchmark after taking active risk. This does not automatically prove the manager is permanently poor, but it does mean that for the measured period, active decisions did not add value relative to the benchmark.
Example 4: Portfolio return from beginning and ending values
Suppose the beginning portfolio value is \( AED\ 100{,}000 \), and the ending portfolio value is \( AED\ 112{,}000 \). The portfolio return is:
If the benchmark return is \( 8\% \) and tracking error is \( 4\% \), the information ratio is \( 1.00 \).
Information ratio vs Sharpe ratio
The information ratio and Sharpe ratio are both risk-adjusted performance measures, but they answer different questions. The information ratio compares portfolio performance with a benchmark. The Sharpe ratio compares portfolio performance with a risk-free rate. This means the information ratio is benchmark-relative, while the Sharpe ratio is total-risk or absolute-risk oriented.
| Measure | Formula | Risk used | Best use |
|---|---|---|---|
| Information ratio | \( IR = \frac{R_p - R_b}{TE} \) | Tracking error, or active risk against benchmark. | Evaluating active manager skill relative to a benchmark. |
| Sharpe ratio | \( SR = \frac{R_p - R_f}{\sigma_p} \) | Total portfolio volatility. | Evaluating return above risk-free rate per unit of total risk. |
Use information ratio when the main question is whether the portfolio added value compared with a benchmark. Use Sharpe ratio when the main question is whether the portfolio generated return above the risk-free rate relative to its total volatility. For active funds, the information ratio is often more relevant because active management is usually judged against a benchmark index.
How to interpret the information ratio
A higher information ratio generally means better active return per unit of active risk. However, the interpretation depends on the time period, the benchmark, the asset class, the reliability of the tracking error estimate, and whether the result is statistically meaningful.
| Information ratio | General interpretation | What to check |
|---|---|---|
| Negative | The portfolio underperformed the benchmark relative to active risk. | Check whether underperformance is persistent or caused by a short-term event. |
| \( 0 \) | No active return above the benchmark. | Check whether active fees are justified if active return is zero. |
| \( 0.25 \) to \( 0.50 \) | Some active value added, but modest relative to tracking error. | Check consistency across periods. |
| \( 0.50 \) to \( 1.00 \) | Potentially strong active performance, depending on context. | Check benchmark fit and data quality. |
| Above \( 1.00 \) | Strong active return per unit of tracking error. | Check whether the result is sustainable and not caused by one unusual period. |
The information ratio should not be used alone. A fund could have a strong information ratio over a short period due to luck. Another fund could have a lower information ratio but better long-term process, lower fees, or better downside control. The ratio is most useful when combined with qualitative analysis, return history, investment process, fees, benchmark fit, and risk controls.
Common mistakes
- Using the wrong benchmark. The benchmark should match the portfolio’s investment universe and strategy.
- Using zero tracking error. The formula cannot divide by zero. Tracking error must be greater than zero.
- Comparing funds with different benchmarks. Information ratios are most meaningful when portfolios share a relevant benchmark.
- Ignoring time period length. A short period may produce unstable or lucky results.
- Using simple beginning and ending values when cash flows exist. Contributions and withdrawals can distort value-based return.
- Confusing active return with total return. The numerator is portfolio return minus benchmark return, not portfolio return alone.
- Ignoring fees and taxes. Use net returns if you want investor-level performance after costs.
A good habit is to calculate information ratio over several time periods and compare it with other metrics. Look at absolute return, benchmark-relative return, drawdown, volatility, Sharpe ratio, fees, and qualitative manager process before drawing a conclusion.
Related calculators and guides
Use these related Num8ers tools to continue working with investment performance, returns, and risk metrics:
FAQs
What is the information ratio?
The information ratio measures excess portfolio return over benchmark return per unit of tracking error. It is commonly used to evaluate active portfolio management.
What is the information ratio formula?
The formula is \( IR = \frac{R_p - R_b}{TE} \), where \( R_p \) is portfolio return, \( R_b \) is benchmark return, and \( TE \) is tracking error.
How do I calculate portfolio return?
If there are no external cash flows, portfolio return can be calculated as \( R_p = \frac{V_1 - V_0}{V_0} \), where \( V_0 \) is beginning portfolio value and \( V_1 \) is ending portfolio value.
What is tracking error?
Tracking error measures how much a portfolio’s returns differ from benchmark returns. It is often calculated as the standard deviation of active returns.
What is a good information ratio?
A higher information ratio generally indicates better active return per unit of tracking error. An information ratio above \( 0.50 \) is often considered useful, and above \( 1.00 \) is often considered strong, depending on context.
Can information ratio be negative?
Yes. A negative information ratio means the portfolio underperformed the benchmark relative to the tracking error taken.
Is information ratio the same as Sharpe ratio?
No. Information ratio compares portfolio return with benchmark return and uses tracking error. Sharpe ratio compares portfolio return with a risk-free rate and uses total portfolio volatility.