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).
The 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.