Finance

Information Ratio Formula - Finance

Learn the information ratio formula with examples, step-by-step guide, and calculator tools. Evaluate active portfolio management skill by comparing excess returns to tracking error against a benchmark index

The information ratio formula is a fundamental concept in finance. Evaluate active portfolio management skill by comparing excess returns to tracking error against a benchmark index. This page provides a comprehensive guide with worked examples and practical applications.

The Formula

\[IR = \frac{R_p - R_b}{\sigma_{p-b}}\]

Variables

IR
Information ratio (active management efficiency)
R_p
Portfolio return (manager's performance)
R_b
Benchmark return (index performance)
σ_{p-b}
Tracking error (consistency of outperformance)

Step-by-Step Guide

  1. 1

    Step 1: Gather your data values

  2. 2

    Step 2: Apply the formula

  3. 3

    Step 3: Perform the calculations

  4. 4

    Step 4: Interpret the result

Examples

Example 1

Example 1: [0.12,0.1,0.02] → Information Ratio = (12% portfolio return - 10% benchmark return) / 2% tracking error = 1.0

Example 2

Example 2: 1

Frequently Asked Questions

What is the information ratio formula?

Evaluate active portfolio management skill by comparing excess returns to tracking error against a benchmark index

How do I calculate information ratio formula?

Use the formula: IR = \frac{R_p - R_b}{\sigma_{p-b}}. Follow the steps provided above.

What tools can help with information ratio formula?

We provide online calculators: npv-calculator, irr-calculator, business-loan-calculator

Related Tools

npv calculator
irr calculator
business loan calculator

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