# How do you explain information ratios?

## How do you explain information ratios?

The information ratio (IR) is a measurement of portfolio returns above the returns of a benchmark, usually an index such as the S&P 500, to the volatility of those returns. The information ratio is used to evaluate the skill of a portfolio manager at generating returns in excess of a given benchmark.

Why is information ratio important?

Information ratio measures the fund’s performance relative to its benchmark and adjusts it for market volatility. If the ratio is between 0.61 and 1, then it is a great investment. Information ratio is extremely useful in comparing a group of funds with similar management styles.

What is the difference between information ratio and Sharpe ratio?

Both ratios determine the risk-adjusted returns of a security or portfolio. However, the information ratio measures the risk-adjusted returns relative to a certain benchmark while the Sharpe ratio compares the risk-adjusted returns to the risk-free rate.

### Who came up with information ratio?

The Information Ratio, developed in 1973 by Treynor & Black, is one of the most important performance measures in the investment management industry (Grinold, 1989, p. 31). It is a ratio for the excess return of a portfolio relative to a specified benchmark divided by the volatility of the excess returns.

What is an acceptable information ratio?

Generally speaking, an information ratio in the 0.40-0.60 range is considered quite good. Information ratios of 1.00 for long periods of time are rare. Typical values for information ratios vary by asset class.

Is a higher information ratio better?

What Is a Good Number? The higher the information ratio, the better. If the information ratio is less than zero, it means the active manager failed on the first objective of outperforming the benchmark.

#### What is a good info ratio?

Is information ratio always positive?

Mathematical Definition Thus, if their portfolio return is in excess of the benchmark, they are considered to add value over the considered time period and the information ratio will be positive. A negative information ratio will denote a portfolio manager or trader who has lost value relative to the benchmark.

How do you calculate information ratio in Excel?

Information ratio Formula = (Rp – Rb) / Tracking error Rb = Benchmark rate of return. Tracking error = Standard deviation of the excess return with respect to the benchmark rate of return.

## What is a good information ratio for a mutual fund?

Generally speaking, an information ratio in the 0.40-0.60 range is considered quite good. Information ratios of 1.00 for long periods of time are rare.

What does a negative information ratio mean?

underperformance
A positive Information Ratio indicates excess return over the benchmark and a negative Information Ratio signifies underperformance.

What is the difference between information ratio and alpha?

Information Ratio measures the fund’s performance relative to its benchmark and adjusts it for the volatility in dispersion. When analysing fund performance, don’t look at the alpha, or active return over the benchmark, in isolation. See it in the context of the risk taken to deliver the return.