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Information Ratio Calculator

Measure a manager's skill with the information ratio.

How it is calculated

The tool computes IR = (Rp − Rb) / TE, where Rp is the portfolio return in percent, Rb is the benchmark return in percent over the same period, and TE is the tracking error in percent, i.e. the standard deviation of the difference between the two returns. The top of the fraction, Rp − Rb, is also shown as the active return.

Tracking error must be above zero or there is no result. The tool does not calculate tracking error from a return series, so you supply it. All three figures must cover the same period and be annualised the same way; a negative IR simply means the portfolio trailed its benchmark.

Worked example

A fund returned 9% while its benchmark returned 7%, with a tracking error of 4%. The active return is 9 − 7 = 2.00%. IR = 2 / 4 = 0.50. In words: the fund earned half a percentage point of extra return for every percentage point of tracking risk it took.

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Common mistakes

  • Using the portfolio's total standard deviation instead of tracking error. That would make this a Sharpe-style ratio rather than an information ratio.
  • Mixing periods, for example an annual active return with a monthly tracking error.
  • Picking a benchmark that does not fit the strategy. The IR is only meaningful against a sensible comparison index.
  • Reading a high IR from a very short record as proof of skill; a few months of data can look good by luck.

Sources

About this calculator

The information ratio (IR) measures a portfolio manager's skill: IR = (portfolio return − benchmark return) ÷ tracking error, where tracking error is the standard deviation of that excess (active) return over time. It answers a specific question — not just whether a manager beat the benchmark, but how consistently they did so relative to the risk taken to deviate from it.

Institutional investors, fund analysts, and consultants use the information ratio to compare active managers and evaluate mandates, since a high IR signals repeatable skill rather than a lucky bet. It's the active-management cousin of the Sharpe ratio: the Sharpe ratio uses total return over the risk-free rate divided by total volatility, while the information ratio isolates performance relative to a chosen benchmark.

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  • Editorial team

    Since the tracking error is an input, it is worth computing it carefully. A common route is to take the standard deviation of the monthly differences between portfolio and benchmark returns and multiply by the square root of 12 to annualise it, then use annual returns for the other two fields. One year of data gives a shaky ratio, so longer histories are more telling. Do you measure tracking error from monthly or weekly returns?

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