Thursday, December 23, 2010

Information Ratio

The information ratio is a measure of portfolio returns as compared to a benchmark, against the volatility of those returns. The ratio reveals how (if) a manager has beaten the benchmark, and basically a higher information ratio indicates more consistent out-performance. The information ratio is calculated as the return on the portfolio less the return on the relevant benchmark (index), divided by the tracking error (or standard deviation of the difference between the portfolio returns and the returns of the index, i.e. the standard deviation of excess returns). Fund managers may provide the statistics in their reports, the statistics may also be available on research databases such as Morningstar, Mercer, and so-on; fund managers should also be able to easily provide this information on request.

Synonyms:  Information ratio, Risk adjusted returns, Tracking error

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