Information ratio

Information ratio

Information Ratio measures the active return of an investment manager divided by the amount of risk the manager takes relative to a benchmark. It is used in the analysis of performance of mutual funds, hedge funds, etc. Specifically, the information ratio is defined as active return divided by tracking error. Active return is the amount of performance over or under a given benchmark index. Thus, active return can be positive or negative. Tracking error is the standard deviation of the active return. An alternative calculation of Information ratio is alpha divided by tracking error, although it is preferable to use pure active return in the calculation.

The ratio compares the annualized returns of the Fund in question with those of a selected benchmark (e.g, 3 month Treasuries). Since this ratio considers the annualized standard deviation of both series (as measures of risks inherent in owning either the fund or the benchmark), the ratio shows the risk-adjusted active return of the Fund over the benchmark. The higher the Information Ratio, the higher the active return of the Fund, given the amount of risk involved, and the better a Fund manager. This ratio is calculated as:

: I = frac{E [R-R_b] }{sigma} = frac{E [R-R_b] }{sqrt{mathrm{var} [R-R_b] ,

where R is the asset return, R_b is the return on a benchmark asset, E [R-R_b] is the expected value of the active return over the benchmark return, and sigma is the standard deviation of the asset return.

Information ratio is similar to the Sharpe Ratio, but there is one major difference. The Sharpe Ratio compares the excess return of an asset against the return of a risk free asset, but the Information Ratio compares active return to the most relevant equity (or debt) benchmark index. Excess Return denotes the return over the risk-free asset while Active Return denotes the return over the benchmark.

ee also

*Jensen's alpha
*Modern portfolio theory
*Sortino ratio
*Calmar ratio
*Treynor ratio
*Upside potential ratio
*Sharpe ratio
*Coefficient of Variation


Wikimedia Foundation. 2010.

Игры ⚽ Нужно сделать НИР?

Look at other dictionaries:

  • information ratio — Indicator that measures the stability of excess returns on an asset or group of assets relative to a benchmark. The information ratio divides this outperformance by its tracking error ( i.e. the standard deviation of the outperformance). A high… …   Financial and business terms

  • Information Ratio - IR — A ratio of portfolio returns above the returns of a benchmark (usually an index) to the volatility of those returns. The information ratio (IR) measures a portfolio manager s ability to generate excess returns relative to a benchmark, but also… …   Investment dictionary

  • Information Ratio — Die Information Ratio ist eine Kennzahl zur Bewertung eines Investmentfonds und beschreibt die Überschussrendite im Verhältnis zum Tracking Error. Sie errechnet sich durch Division der Fondsrendite (ausgedrückt im Alpha) durch das Fondsrisiko… …   Deutsch Wikipedia

  • information ratio —   Indicatore della validità della gestione tattica di un fondo ed è calcolato utilizzando il differenziale fra rendimento del fondo e rendimento del benchmark …   Glossario di economia e finanza

  • Ratio — ist ein lateinischer Begriff und wird häufig mit Vernunft oder Verstand übersetzt. In der Mathematik dagegen bedeutet das Wort meist „Verhältnis“ beziehungsweise „Quotient“ und weist darauf hin, dass eine Größe zu einer anderen in Beziehung… …   Deutsch Wikipedia

  • Information entropy — Während ordinale Insolvenzprognosen lediglich eine Reihung von Unternehmen entsprechend den erwarteten Ausfallwahrscheinlichkeiten vornehmen, ordnen kardinale Insolvenzprognosen jedem Unternehmen explizit eine Ausfallwahrscheinlichkeit zu.[1]… …   Deutsch Wikipedia

  • Ratio D'information — Le ratio d information est un ratio égal au rendement moyen d’un actif par rapport à la moyenne d un point de référence, divisée par l erreur de suivi de ce dernier. Il s’agit donc d’un indicateur synthétique de l’efficacité du couple… …   Wikipédia en Français

  • Ratio Studiorum — • The educational system of the Jesuits Catholic Encyclopedia. Kevin Knight. 2006. Ratio Studiorum     Ratio Studiorum     † …   Catholic encyclopedia

  • Information overload — refers to excess amounts of information being provided, making the processing and absorbing tasks very difficult for the individual because we cannot see the validity behind the information (Yang, 2003 [Yang, C.C. (2003) Decision Support Systems …   Wikipedia

  • information theory — the mathematical theory concerned with the content, transmission, storage, and retrieval of information, usually in the form of messages or data, and esp. by means of computers. [1945 50] * * * ▪ mathematics Introduction       a mathematical… …   Universalium

Share the article and excerpts

Direct link
Do a right-click on the link above
and select “Copy Link”