The information ratio (IR) quantifies how much of a portfolio’s excess return over its benchmark is earned for each unit of active risk. It focuses on relative performance rather than total volatility.
IR = Active Return / Tracking Error, where Active Return = Portfolio Return − Benchmark Return, and Tracking Error is the standard deviation of the active return across the evaluation period.
Investors and analysts use IR to compare managers or strategies that share a benchmark and a similar time horizon. A higher IR indicates more consistent outperformance per unit of relative risk; a negative IR signals underperformance relative to the benchmark. The value can vary with the chosen benchmark and period, so comparisons should use the same reference and timeframe. IR complements other risk-adjusted measures like the Sharpe ratio, which uses total volatility rather than active risk.
IR summarizes historical consistency of relative performance and should be interpreted in the context of style, turnover, and benchmark suitability. It does not guarantee future results and can be influenced by the length of the observation window.
For example, if a portfolio returns 8% and its benchmark returns 5%, the active return is 3%. If the tracking error is 2%, the information ratio is 3% ÷ 2% = 1.5.
Active return · Tracking error · Benchmark · Sharpe ratio · Alpha · Active risk