Information Ratio Calculator

How to Use the Information Ratio Calculator

The Information Ratio (IR) measures the risk-adjusted excess return of a portfolio or fund relative to a benchmark. Our calculator gives you the IR and active return in seconds.

1. Enter Portfolio Return: Your portfolio's average or annualized return in percent (e.g. 12 for 12%).
2. Enter Benchmark Return: The return of your benchmark index or strategy (e.g. S&P 500 at 10%).
3. Enter Tracking Error: The standard deviation of the difference between portfolio and benchmark returns (in %). It reflects how much your returns deviate from the benchmark.
4. Read Results: Active return is Portfolio − Benchmark. Information Ratio = Active Return ÷ Tracking Error.

What is the Information Ratio?

The Information Ratio answers: "How much excess return do I get for each unit of active risk (tracking error)?" It is defined as:

IR = (Portfolio Return − Benchmark Return) / Tracking Error

Active return is the difference between your portfolio return and the benchmark return. Tracking error is the volatility of that difference—how much your performance swings above or below the benchmark over time.

• Higher IR: More excess return per unit of tracking error; often interpreted as better manager or strategy skill.
• IR = 0: No excess return on average; performance matches the benchmark after adjusting for active risk.
• Negative IR: Underperformance vs. benchmark on a risk-adjusted basis.

Why the Information Ratio Matters

Unlike raw returns, the IR accounts for how much risk was taken relative to the benchmark. It is widely used in institutional investing to evaluate fund managers and strategies.

• Manager Evaluation: Compare managers or strategies on a level playing field—who adds more value per unit of active risk?
• Strategy Quality: A strategy that beats the index with low tracking error has a higher IR than one that beats it with high volatility of excess returns.
• Allocation Decisions: Use IR alongside Sharpe and Sortino to decide how much to allocate to active vs. passive strategies.

What is a Good Information Ratio?

There is no universal threshold, but common guidelines:

• IR ≥ 0.5: Often considered good; indicates meaningful, relatively consistent excess return per unit of tracking error.
• IR ≥ 0.75: Strong; typical of top-tier active managers over long periods.
• IR < 0: The portfolio underperformed the benchmark on a risk-adjusted basis; passive may be preferable.

IR is typically computed over multi-year periods (e.g. 3–5 years) to reduce noise. Use the same return frequency (e.g. monthly) for portfolio, benchmark, and tracking error.

Frequently Asked Questions