The Information Ratio

The Information Ratio is a risk-reward benchmark that is often used to quantify the performance of an investment (and specifically the effectivess of a fund manager). It’s equal to the average excess return divided by the standard deviation of the excess returns (relative to a benchmark).

Information Ratio EquationThe Information Ratio (often called the Appraisal Ratio) is simply the active return divided by the standard deviation of the tracking error.  A higher Information Ratio is better (indicating better stock picking by the fund manager), with a value of 0.5 indicating upper quartile performance.Negative Information Ratios can be misleading and should not be used to rank investments.

The Information Ratio is often used to distinguish between several funds with the same management style.  For funds with similar values of Jensen’s Alpha, a higher Information Ratio indicates a better managed fund with superior stock picking. However, this is only valid if the fund and its benchmark are strongly correlated.

This Excel spreadsheet helps you calculate the Information Ratio, as well as the alpha and beta of an Investment

Information Ratio ExcelDownload Excel spreadsheet to calculate Information Ratio, Alpha and Beta

5 thoughts on “The Information Ratio

  1. Can you tell me how to put my own data in this spreadsheet? It looks very interesting and a whole lot easier than computing the results myself.

  2. I think there is an error in the Alpha formula. It should be B20-F6-G8*(C20-F6) instead of B20-F6+G8*(C20-F6)

  3. Hi: first visit, but likely to become a regular…very much like what I see.

    I hate to send an “I can’t open the file” message, but my (up-to-date) system warns that:

    “The file format and extension of “Calculate-Information-Ratio-with-Excel (2).xlt do not match, The file could be corrupted or unsafe….”

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