Information Ratio Calculator
Enter your portfolio return, benchmark return, and tracking error to calculate the information ratio - the standard measure of active fund manager skill. You can also paste comma-separated periodic returns for both the portfolio and benchmark and the calculator will derive the tracking error for you. Results update instantly, with a performance classification, step-by-step breakdown, and a chart showing how the information ratio changes as active returns grow.
Formula
Worked example
A fund returns 12% while its benchmark (S&P 500) returns 9%. The standard deviation of the monthly return differences, annualised, is 6%. Active return = 12% - 9% = 3%. IR = 3% / 6% = 0.50, placing the manager in the "Good" band.
What is the information ratio?
The information ratio (IR) measures how much excess return a portfolio generates above its benchmark per unit of active risk taken. It is the standard metric used by institutional investors and pension funds to judge whether an active fund manager is genuinely adding value or simply taking on more risk. A high information ratio means the manager consistently delivers returns above the benchmark without a proportionally large increase in volatility. The ratio is closely related to the Sharpe ratio, but uses active return (portfolio minus benchmark) rather than excess return above the risk-free rate, making it specifically suited to evaluating active versus passive management decisions.
How is the information ratio calculated?
The formula is IR = (Rp - RB) / TE, where Rp is the portfolio return, RB is the benchmark return, and TE (tracking error) is the standard deviation of the excess returns over the period. Tracking error is calculated from the period-by-period differences between portfolio and benchmark returns, then annualised by multiplying by the square root of the number of periods per year. For example, if monthly excess returns have a standard deviation of 1.73%, the annualised tracking error is 1.73% x sqrt(12) = 6.0%. If the annualised active return is also 3%, the information ratio is 3% / 6% = 0.50.
Information ratio vs Sharpe ratio
Both ratios measure reward per unit of risk, but they answer different questions. The Sharpe ratio compares total portfolio returns against the risk-free rate, measuring absolute risk-adjusted performance. The information ratio compares portfolio returns against a specific benchmark, measuring relative or active performance. For an active manager, the information ratio is more relevant because it captures whether the active decisions - stock picks, sector tilts, timing calls - are being rewarded above what a passive index would deliver. A manager with a high Sharpe but low information ratio may simply be running a low-volatility portfolio that tracks the index closely without adding alpha.
Typical benchmark ranges and fund categories
Institutional investors typically require an information ratio above 0.5 before considering a manager to be demonstrating skill. A ratio above 1.0 is considered exceptional and is rare over long time horizons. Different asset classes tend to produce different typical ranges: large-cap equity funds generally show lower ratios due to efficient markets and higher competition, while small-cap, emerging markets, and alternative strategies can produce higher ratios but with greater variability. Passive and near-passive strategies (index funds, smart-beta) intentionally target a ratio near zero by minimising active risk. Always compare a manager information ratio against the peer group within the same asset class and benchmark, rather than applying a single universal threshold.
Information Ratio interpretation guide
| Information Ratio | Classification | Interpretation |
|---|---|---|
| Above 1.0 | Excellent | Top-tier active management, rare and highly valued |
| 0.5 to 1.0 | Good | Evidence of consistent alpha generation |
| 0.0 to 0.5 | Marginal | Modest outperformance, may not justify active fees |
| -0.5 to 0.0 | Below benchmark | Active returns lag the benchmark on a risk-adjusted basis |
| Below -0.5 | Weak | Significant underperformance relative to benchmark |
Industry-standard thresholds used by institutional investors to evaluate active portfolio managers.
Frequently asked questions
What is a good information ratio?
Most institutional investors consider an information ratio above 0.5 to indicate good active management, and a ratio above 1.0 to be excellent. Ratios between 0.0 and 0.5 are marginal - the manager is outperforming but not by enough to clearly justify active fees. Negative values indicate the manager is underperforming the benchmark on a risk-adjusted basis. These thresholds should always be compared within the relevant asset class and peer group.
What is tracking error and how is it calculated?
Tracking error (also called active risk) is the standard deviation of the differences between portfolio returns and benchmark returns over a series of periods. You subtract the benchmark return from the portfolio return for each period to get excess returns, then calculate the standard deviation of those excess returns. To annualise it, multiply by the square root of the number of periods per year (e.g., sqrt(12) for monthly data).
Can the information ratio be negative?
Yes. A negative information ratio means the portfolio is returning less than the benchmark, so the active return is negative. Even if the magnitude is small, taking on active risk to underperform is considered poor management. The more negative the ratio, the worse the risk-adjusted underperformance.
How is the information ratio different from the Sharpe ratio?
The Sharpe ratio divides excess return above the risk-free rate by total portfolio volatility. The information ratio divides active return (portfolio minus benchmark) by tracking error (volatility of that active return). The Sharpe ratio measures absolute risk-adjusted performance; the information ratio measures the manager's skill relative to a specific benchmark. For evaluating active funds, the information ratio is usually more appropriate.
How many periods of data do I need for a reliable information ratio?
Most practitioners recommend at least 36 months (3 years) of monthly data to get a statistically meaningful information ratio. Shorter periods are subject to substantial noise - a manager can post a high ratio for one year purely by chance. Longer periods (5 to 10 years) covering different market regimes provide much greater confidence that the ratio reflects genuine skill rather than luck.
What benchmark should I use?
The benchmark should be the index that most closely represents the investable universe or mandate of the portfolio. A large-cap US equity fund would typically use the S&P 500; a bond fund might use the Bloomberg US Aggregate Bond Index; an international equity fund might use the MSCI EAFE. Using an inappropriate benchmark - one that is much easier or harder to beat than the fund's actual strategy - distorts the information ratio significantly.