Information Ratio
The Information Ratio (IR) is a measure that compares the returns of an asset or portfolio relative to a benchmark, adjusted for risk. It helps assess the consistency of a fund or fund manager’s performance over time. The formula for IR is the excess return of the asset or portfolio over the benchmark, divided by the tracking error (the standard deviation of the excess return). A higher IR indicates better risk-adjusted performance, making it a useful tool for comparing fund managers who follow similar strategies. It highlights the ability to generate consistent alpha (outperformance).
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