How this calculator works
The information ratio divides portfolio return above a chosen benchmark by tracking error, the standard deviation of active returns. Supply a representative return and tracking error on the same periodic or annualized basis. Endpoint portfolio values assume no external cash flows and exclude distributions unless already included in the ending value.
Formula
Information ratio = (Rp - Rb)/TE. Rp is portfolio return, Rb benchmark return and TE a positive tracking error on the same time basis.
Worked example
A 10% portfolio return against a 7% benchmark with 5% tracking error gives 0.6. A 4% return against a 6% benchmark with 4% tracking error gives -0.5.
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Frequently asked questions
Can the information ratio be negative?
Yes. It is negative when the supplied portfolio return trails the benchmark.
What if tracking error is zero?
The ratio is undefined, including the 0/0 case, so no result is returned.
Is tracking error portfolio volatility?
It is the volatility of portfolio-minus-benchmark returns. Portfolio volatility alone is a different denominator.