Information Ratio

The information ratio (IR) is a performance measurement tool that compares the excess return of an investment or portfolio to its tracking error, which measures how closely the investment tracks its benchmark. The ratio is used to evaluate how efficiently a portfolio manager generates excess returns relative to the risk taken. A higher information ratio indicates better risk-adjusted returns, making it a popular metric for comparing active fund managers.

Example

A mutual fund has an annual excess return of 4% over its benchmark with a tracking error of 2%. Its information ratio would be 2, indicating good risk-adjusted performance.