Information Ratio Calculator

Calculate active return and information ratio from portfolio performance, benchmark performance, and tracking error. Information Ratio Calculator helps investors, portfolio managers, and analysts evaluate benchmark-relative performance and risk-adjusted investment skill.

Highlights

  • Compare portfolio performance with a selected benchmark.
  • Calculate active return from portfolio and benchmark returns.
  • Measure risk-adjusted performance using the Information Ratio.
  • Use tracking error to evaluate benchmark-relative risk.
  • Ideal for investors, portfolio managers, and financial analysts.

Table of Contents

  1. How Information Ratio Calculator Works?
  2. Practical Use Cases
  3. Accuracy and Limitations
  4. Quick Examples
  5. Frequently Asked Questions (FAQs)
  6. Cite This Calculator

How Information Ratio Calculator Works?

The Information Ratio Calculator evaluates how effectively a portfolio outperforms or underperforms its benchmark after considering the volatility of that relative performance. It uses three inputs: portfolio return, benchmark return, and tracking error.

First, the calculator determines the active return, which is the portfolio return minus the benchmark return:

Active Return=Portfolio Return−Benchmark Return

The active return indicates whether the portfolio beat or lagged its benchmark. A positive result means the portfolio outperformed, while a negative result means it underperformed.

Next, the calculator divides the active return by tracking error. Tracking error represents the volatility of the portfolio's returns relative to the benchmark:

Information Ratio=Active ReturnTracking Error

Because both active return and tracking error are entered as percentages, the percentage scale is consistent in the calculation. For example, if a portfolio returns 10%, the benchmark returns 8%, and tracking error is 5%, the results are:


CalculationResult
Active Return10% − 8% = 2%
Information Ratio2% ÷ 5% = 0.40

An information ratio of 0.40 means the portfolio generated 0.40 units of active return for each unit of relative-performance risk, based on the entered evaluation-period data.

Practical Use Cases

Individual investors can compare an actively managed fund or portfolio with its stated benchmark. For example, a portfolio return of 10% against a benchmark return of 8% produces a 2% active return, while the information ratio shows whether that outperformance was achieved with relatively controlled tracking error.

Portfolio managers can use the calculator to review benchmark-relative skill during a reporting period. A positive information ratio indicates outperformance relative to tracking risk, while a negative value signals that the portfolio lagged its benchmark.

Investment analysts can use active return and information ratio results when comparing managers, strategies, or funds. The ratio helps distinguish simple benchmark outperformance from outperformance achieved with lower relative volatility.

Financial advisers can use the results when discussing whether an actively managed strategy has added value beyond its benchmark. The calculation provides a concise comparison of excess performance and the tracking error associated with it.

Accuracy and Limitations

The calculator accurately applies active return = portfolio return − benchmark return and information ratio = active return ÷ tracking error to the values entered. Its results are limited by the quality and comparability of the inputs: portfolio and benchmark returns must cover the same evaluation period, and tracking error must represent the same portfolio-benchmark relationship and period. The calculator accepts portfolio and benchmark returns from −100% to 1,000%, tracking error from 0.01% to 1,000%, and values in increments of 0.01%. It does not estimate tracking error, account for fees or taxes, annualize results, or assess whether the selected benchmark is appropriate. A tracking error close to zero can also produce a very large information ratio, making the result sensitive to small input changes.

Quick Examples

Example #1: Outperforming Portfolio

Evaluates a portfolio that exceeds its benchmark with moderate tracking error.

Example #2: Underperforming Portfolio

Measures the information ratio when portfolio performance trails the benchmark.

Example #3: Strong Risk-Adjusted Performance

Assesses a portfolio with substantial benchmark outperformance and low tracking error.

Frequently Asked Questions

The Information Ratio measures how consistently an investment manager generates excess returns relative to a benchmark for each unit of benchmark-relative risk. A higher value generally indicates stronger risk-adjusted performance.

A positive Information Ratio indicates that an investment outperformed its benchmark on average during the period analyzed. The larger the value, the more favorable the excess-return-to-risk relationship tends to be.

A negative Information Ratio means the investment underperformed its benchmark relative to the risk taken. More negative results generally suggest less favorable benchmark-relative performance.

Active return is the difference between an investment's return and its benchmark's return over the same period. It shows whether the investment outperformed or underperformed its comparison standard.

Portfolio managers, institutional investors, financial analysts, and investment researchers commonly use it to assess benchmark-relative performance and compare active strategies.

Cite This Calculator