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Information Ratio Calculator

Calculate information ratio from portfolio return, benchmark return, and tracking error to evaluate active return per unit of active risk.

Published

Information ratio
Excess return per unit of tracking error
0.40
Portfolio return
10%
Benchmark return
8%
Active return
2%
Tracking error
5%
Beginning value
$2,000,000.00
Ending value
$2,200,000.00

The portfolio outperformed the benchmark by 2% with 5% tracking error.

$
$
Return of the index or benchmark for the same period.
%
Standard deviation of active return, entered as percentage points.
%

Results update as you type.

Information Ratio Calculator

The information ratio measures how much active return a portfolio produced for each unit of tracking error. It is a benchmark-relative performance tool. Instead of asking whether the portfolio made money in absolute terms, it asks whether the portfolio beat or lagged its benchmark, and whether that active result was large relative to the amount of benchmark deviation taken.

This calculator follows a specific compute path. It calculates portfolio return from beginning and ending values. It subtracts the benchmark return entered by the user to get active return. It divides active return by tracking error to get the information ratio. The output also shows the beginning value, ending value, portfolio return, benchmark return, active return, and tracking error so the ratio can be checked line by line.

Use the Jensen’s Alpha Calculator if you want beta-adjusted performance against CAPM rather than tracking-error efficiency. Use the Portfolio Beta Calculator to estimate market sensitivity of a set of holdings. Use the CAPM calculator to review the expected-return model that often sits beside active-performance analysis.

Informational, not investment advice.

When the information ratio is useful

The information ratio is most useful for strategies that are intentionally managed against a benchmark. An index-aware equity manager, sector-rotation strategy, or active bond portfolio may all be judged not just on whether they earned positive returns, but on whether they added value compared with the assigned benchmark. A manager who outperforms by 2 percentage points with 5 percent tracking error has a different profile from a manager who outperforms by 2 percentage points with 15 percent tracking error.

The ratio helps separate active return from active risk. Tracking error is not bad by itself. A concentrated strategy may need tracking error to express its views. But if a strategy takes large deviations from the benchmark and produces little or negative active return, the information ratio will reflect that poor trade-off. Conversely, a consistently positive active return with modest tracking error can produce a strong ratio.

Formula

The calculator first computes portfolio return as a percentage:

portfolio return=ending value−beginning valuebeginning value×100\text{portfolio return} = \frac{\text{ending value} - \text{beginning value}}{\text{beginning value}} \times 100

Active return is portfolio return minus benchmark return:

active return=portfolio return−benchmark return\text{active return} = \text{portfolio return} - \text{benchmark return}

The information ratio is active return divided by tracking error:

information ratio=active returntracking error\text{information ratio} = \frac{\text{active return}}{\text{tracking error}}

Because both active return and tracking error are entered or computed in percentage points, their units cancel. The result is a decimal ratio. The calculator formats it with two decimals.

Worked example

Use the default inputs: beginning portfolio value of $2,000,000, ending portfolio value of $2,200,000, benchmark return of 8 percent, and tracking error of 5 percent.

Portfolio return is:

portfolio return=$2,200,000−$2,000,000$2,000,000×100=10%\text{portfolio return} = \frac{\$2{,}200{,}000 - \$2{,}000{,}000}{\$2{,}000{,}000} \times 100 = 10\%

Active return is 10 percent minus 8 percent, or 2 percent. Tracking error is 5 percent. Therefore:

information ratio=2%5%=0.40\text{information ratio} = \frac{2\%}{5\%} = 0.40

The calculator shows an information ratio of 0.40 and labels it excess return per unit of tracking error. It also states that the portfolio outperformed the benchmark by 2 percent with 5 percent tracking error. If the ending value were $1,960,000 instead, portfolio return would be negative 2 percent, active return would be negative 10 percent against the 8 percent benchmark, and the ratio would be negative 2.00.

How to use the result

An information ratio is a compact way to compare active strategies, but only when the benchmark and data quality are comparable. A global equity strategy and a domestic large-cap strategy may have very different opportunity sets and tracking-error norms. A short sample can make the ratio unstable. A low tracking error can magnify small differences, while a high tracking error can hide whether the manager is taking uncompensated bets.

For manager evaluation, review the ratio across multiple rolling periods. Look at whether active return came from repeatable sources or a single lucky sector call. Confirm that returns are net or gross of fees according to the decision being made. If taxes, transaction costs, or cash flows affect the ending value, make sure the return series used in the calculator treats them consistently.

Limitations and common mistakes

The information ratio is not a total-risk measure. It ignores absolute volatility except to the extent volatility appears as benchmark-relative tracking error. It does not say whether the portfolio can lose money. A portfolio can have a positive information ratio in a down market if it loses less than its benchmark.

Do not enter portfolio volatility in the tracking error field unless portfolio volatility actually equals the standard deviation of active returns, which is uncommon. Do not mix monthly tracking error with annual portfolio and benchmark returns. Do not change benchmarks after seeing the result. The benchmark is the yardstick; changing it can turn analysis into data mining.

Sources

Frequently asked questions

What does the information ratio measure?
The information ratio measures active return per unit of tracking error. It compares a portfolio's return with a benchmark return, then divides the difference by the volatility of that active return. A higher positive result suggests more benchmark-relative return for each unit of active risk.
What is active return?
Active return is portfolio return minus benchmark return for the same period. In this calculator, portfolio return is computed from beginning and ending portfolio values, while benchmark return is entered directly as a percentage. Positive active return means the portfolio beat the benchmark.
What is tracking error?
Tracking error is the standard deviation of active returns, usually measured across repeated periods such as months or quarters. It describes how much the portfolio typically deviates from its benchmark. This calculator expects tracking error as percentage points and requires it to be greater than zero.
How is the information ratio different from the Sharpe ratio?
The Sharpe ratio compares excess return over a risk-free rate with total portfolio volatility. The information ratio compares excess return over a chosen benchmark with tracking error. It is therefore more focused on active management and benchmark-relative consistency.

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