what is a good information ratio

As a rough guide, an information ratio around 0.5 is good, 0.75 is very good, and 1.0 or above is exceptional and rare over long periods. The reason the bar looks low compared with a Sharpe ratio is that consistently beating a benchmark is genuinely hard — most active managers fail to do it after costs. An information ratio should also be judged over a meaningful stretch of years, because a high one measured over a short window is far more likely to be luck than skill.

what is the difference between the information ratio and the sharpe ratio

The Sharpe ratio measures return above the risk-free rate per unit of total volatility — it judges a portfolio in absolute terms. The information ratio measures return above a benchmark per unit of tracking error — it judges a portfolio relative to what it was trying to beat. So Sharpe asks "were you well paid for your risk?" while the information ratio asks "did you add value over the index you are measured against, consistently?" The information ratio is the natural yardstick for an active manager whose job is to beat a specific benchmark.

What is the information ratio and what is a good one

An active fund manager has one job: beat the benchmark. But beating it once, by luck, is easy — beating it consistently, without taking wild bets that stray far from the index, is the real test. The information ratio is the number that captures exactly that, which is why it is the professional’s measure of active skill.

Active return over tracking error

Two ingredients. Active return is how much the portfolio beat its benchmark — its return minus the index’s. Tracking error is the volatility of that active return: how much the outperformance jumps around from period to period. The information ratio divides the first by the second, asking: for every unit of risk you took deviating from the benchmark, how much did you actually beat it by? Steady outperformance scores high; lumpy, lucky outperformance scores low.

Worked example

Two managers who both beat the index by 3%

Benchmark-relative

Manager A active returnTracking error 4%+3%

Manager A info ratioConsistent outperformance3 ÷ 4 = 0.75

Manager B active returnTracking error 12%+3%

Manager B info ratioLumpy, bet-driven3 ÷ 12 = 0.25

Same beatA did it reliablyVery different skill

Both managers beat the index by the same 3%, but A did it with steady, low-tracking-error outperformance while B did it through big, erratic bets. A’s information ratio of 0.75 versus B’s 0.25 reveals that A’s edge is far more likely to be repeatable skill and B’s far more likely to be luck — a distinction the raw 3% outperformance completely hides.

Check yourself

Two funds each beat their benchmark by 4% last year. Fund X had a tracking error of 5%; Fund Y had 16%. Which shows more evidence of genuine skill?

Simple bhasha mein

Benchmark ko kitni consistency se haraaya

Active fund manager ka kaam: index ko haraana. Information ratio = (return − benchmark) ÷ tracking error — matlab kitna zyada kamaya, benchmark se hatt ke kitna risk le ke. Dono ne index ko 3% se haraaya — par ek ne steady (TE 4%, IR 0.75), doosre ne bade jhatkon se (TE 12%, IR 0.25). Pehla asli skill, doosra luck. 0.5 achha, 1.0+ bahut rare. Sahi benchmark, fees ke baad, kai saal — tabhi bharosa.

What to remember

The information ratio is active return (over the benchmark) divided by tracking error.
It measures how consistently a manager beats their benchmark, not just by how much.
Rough bands: ~0.5 good, 0.75 very good, 1.0+ exceptional and rare.
Unlike Sharpe (absolute), it judges a portfolio relative to what it aims to beat.
Judge it against the correct benchmark, net of fees, over years — a short-window figure is luck.

You reached the endMark it done and keep your streak going.

Up nextJensen’s alpha: return the market did not owe you Previous: The Treynor ratio: return per unit of market risk

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Common questions

Short, direct answers to what people ask about this topic.

what is the information ratio: The information ratio measures how much a portfolio beat its benchmark relative to how much risk it took in deviating from that benchmark. It is calculated as the active return — the portfolio’s return minus the benchmark’s — divided by the tracking error, which is the volatility of that active return. A high information ratio means a manager has added return consistently rather than through a few lucky bets, so it is widely regarded as the best single measure of active management skill.
what is a good information ratio: As a rough guide, an information ratio around 0.5 is good, 0.75 is very good, and 1.0 or above is exceptional and rare over long periods. The reason the bar looks low compared with a Sharpe ratio is that consistently beating a benchmark is genuinely hard — most active managers fail to do it after costs. An information ratio should also be judged over a meaningful stretch of years, because a high one measured over a short window is far more likely to be luck than skill.
what is the difference between the information ratio and the sharpe ratio: The Sharpe ratio measures return above the risk-free rate per unit of total volatility — it judges a portfolio in absolute terms. The information ratio measures return above a benchmark per unit of tracking error — it judges a portfolio relative to what it was trying to beat. So Sharpe asks "were you well paid for your risk?" while the information ratio asks "did you add value over the index you are measured against, consistently?" The information ratio is the natural yardstick for an active manager whose job is to beat a specific benchmark.

The information ratio: skill against a benchmark

Active return over tracking error

Common questions