Information Ratio

The information ratio (IR) is a measure of the excess return of an investment compared to its benchmark, relative to the investment's tracking error. It is a risk-adjusted performance measure that can be used to compare different investments or to evaluate the performance of an investment manager.

The information ratio is calculated as follows:

IR = (R - Rf) / s

where:

• R is the return of the investment
• Rf is the risk-free rate of return
• s is the tracking error of the investment

The information ratio is a useful measure of investment performance because it takes into account both the return and the risk of the investment. A high information ratio indicates that the investment has generated a high return relative to its risk.

However, the information ratio can be misleading if the investment has a high tracking error. This is because a high tracking error means that the investment is not closely correlated with its benchmark, and therefore the information ratio may not be a reliable measure of its performance.

The information ratio is also not a good measure of performance for investments that have a short track record. This is because the tracking error of an investment can be volatile over short periods of time, and therefore the information ratio may not be a reliable measure of its long-term performance.

Despite these limitations, the information ratio is a useful tool for comparing the performance of different investments and for evaluating the performance of investment managers.