Information Ratio Calculator
Measure active management performance: Information Ratio = (portfolio return − benchmark return) ÷ tracking error.
Input Data
Results
At a glance:The Information Ratio (IR) measures a portfolio's active excess return over its benchmark and how consistently: IR = (portfolio return − benchmark return) ÷ tracking error. The numerator is the active excess return; the denominator 'tracking error' is the standard deviation of the portfolio-benchmark return difference (the volatility of active returns). The higher the ratio, the more steadily the manager beats the benchmark. Generally 0.4–0.6 is good, 0.6–1.0 excellent, >1.0 outstanding.
Formula
Portfolio return = (ending value − beginning value) ÷ beginning value.
Information ratio = (portfolio return − benchmark return) ÷ tracking error.
Tracking error = standard deviation of the (portfolio return − benchmark return) difference series.
$$IR = \dfrac{R_p - R_b}{TE}$$$$TE\text{ (tracking error) is the standard deviation of active return }(R_p - R_b).$$$$\text{Example: }\dfrac{10\% - 8\%}{5\%}=0.4$$How to Use
- Enter the beginning and ending portfolio values.
- Enter the benchmark return and tracking error (%) for the same period.
- View the portfolio return and information ratio instantly.
How tracking error changes the IR at the same excess return (portfolio 10%, benchmark 8%)
| Portfolio | Benchmark | Excess | Tracking error | Information ratio |
|---|---|---|---|---|
| 10% | 8% | +2% | 5% | 0.40 (good) |
| 10% | 8% | +2% | 2% | 1.00 (outstanding) |
| 5% | 8% | −3% | 5% | −0.60 (underperforms) |
Case Studies
Case 1: Computing the information ratio
An active fund starts at HK$2,000,000 and ends at HK$2,200,000; the benchmark (e.g. Hang Seng) returned 8% with tracking error 5%.
Portfolio return = (2,200,000 − 2,000,000) ÷ 2,000,000 = 10%; excess return = 10% − 8% = 2%; IR = 2% ÷ 5% = 0.4.
Interpretation: the fund beat the benchmark by 2%, IR 0.4, a 'good' level (0.4–0.6). It means for each unit of active risk (deviation from benchmark) the manager earned 0.4 units of excess return. IR reflects both the size and the stability of excess return, better than return alone for judging real active-management quality.
Case 2: Steady outperformance beats volatile swings
Compare two funds both beating the benchmark by 2%. A: excess 2%, tracking error 5% (sometimes big wins, sometimes lags), IR = 2 ÷ 5 = 0.4. B: same 2% excess but tracking error only 2% (steadily ahead every period), IR = 2 ÷ 2 = 1.0.
Both average +2%, but B's IR (1.0) is 2.5× A's (0.4) because B's excess is more stable and predictable.
Interpretation: IR's core value is incorporating the stability of excess return. A also averages +2% but with large tracking error — big wins some periods, lags others — so the volatility-driven excess is of doubtful sustainability; B leads steadily every period, reflecting repeatable, reliable active skill. Investors usually prefer a manager who 'steadily and consistently beats by a little' over one who 'occasionally wins big but often lags'. WARNING: tracking error must be computed from the multi-period portfolio-benchmark return difference series, and comparisons need a consistent benchmark; short-term IR is volatile, so use a longer period.
FAQ
How high is a good information ratio?
Generally 0.4–0.6 is good, 0.6–1.0 excellent, >1.0 outstanding. It reflects both the size and stability of excess return, giving a fuller picture than return alone.
What is tracking error?
Tracking error is the standard deviation of the period-by-period difference between portfolio return and benchmark return; a larger value means the portfolio deviates from the benchmark more sharply. It is the denominator of the IR, measuring the volatility of active returns.
How does the information ratio differ from the Sharpe ratio?
The Sharpe ratio uses the risk-free rate as the benchmark and total volatility as the denominator; the information ratio uses the market benchmark index as the benchmark and tracking error as the denominator, specifically measuring active management ability relative to the benchmark.
How exactly is tracking error computed, and what does its size mean?
Tracking error (TE) is the denominator of the IR and the key to understanding 'active risk'. It is defined as the standard deviation of the difference between portfolio return and benchmark return (i.e. the active return). Steps: (1) take each period's (e.g. monthly/quarterly) portfolio return and the same-period benchmark return; (2) subtract period by period to get the active-return series (positive = beat, negative = lag); (3) take the standard deviation of that series — that is the tracking error. In one phrase: TE measures how violently the portfolio's return swings around the benchmark. Size meaning: smaller TE means the portfolio tracks the benchmark closely with stable active returns (like an enhanced index fund); larger TE means it often deviates sharply — big wins some periods, big lags others — a high-active fund with higher uncertainty in active returns. TE itself is neither absolutely good nor bad: passive index funds seek TE near zero; active funds necessarily have some TE (you must deviate to have a chance to beat). The key is whether that active risk is exchanged for corresponding excess return — exactly what IR answers: IR = excess return ÷ tracking error, measuring 'how much excess return per unit of active risk'. So for active funds, do not just dislike a large TE; see whether the deviation bought enough stable excess return (i.e. high IR). This calculator takes the already-computed TE (as a percentage); you must first derive it from the historical portfolio-benchmark return difference series.
What is the difference between IR and Sharpe, and when to use which?
Both are risk-adjusted return metrics with similar form (excess return ÷ risk) but differ in benchmark and risk definition, hence in use. Two core differences. (1) Numerator benchmark: Sharpe's excess return is portfolio return − risk-free rate, measuring return vs doing nothing risky (e.g. government bonds); IR's excess return is portfolio return − benchmark return, measuring active excess vs the market benchmark. (2) Denominator risk: Sharpe uses total standard deviation (total volatility of the portfolio return); IR uses tracking error (std dev of the portfolio-benchmark difference, i.e. active-return volatility). This decides the questions: Sharpe answers 'overall, how much excess return per unit of total risk' — good for judging 'is this investment worth it' or comparing very different styles; IR answers 'this active manager, relative to their benchmark, how much excess per unit of active risk' — specifically for active-management ability and stability. When to use which: (1) to judge whether an active manager earns their fee (stable excess vs the index) use IR; (2) to compare overall risk-return efficiency across assets/strategies, or whether the money is well invested vs risk-free, use Sharpe; (3) in practice view both — a good active manager has high Sharpe (good overall efficiency) and high IR (steady outperformance). If Sharpe is high but IR low, the good show may come mainly from tracking the benchmark, not stock selection; high IR better indicates real, sustainable active skill. This calculator provides IR; pair it with the Sharpe calculator for fuller evaluation.
Related Tools
References
Content review: Calculatorism Finance Team. Results are for reference only; please refer to the relevant authorities for the official figures.