What is information ratio?

This is a way of measuring a fund manager's ability to generate excess returns  by measuring the return of their portfolio and dividing it by the amount of risk taken.

Where have you heard about information ratio?

It's sometimes known as the appraisal ratio. You might have heard how it's used to measure the performance of mutual fund and hedge fund managers.

What you need to know about information ratio...

It's designed to tell an investor how much return is generated from the amount of excess risk taken. A high information ratio signals a more consistent and better-performing fund. It works in a similar way to the Sharpe ratio, as both measure risk-adjusted returns. But the Sharpe ratio measures the difference between the return and the risk-free rate, divided by the standard deviation of returns. The information ratio measures the risk-adjusted return in relation to a specific benchmark, such as the Standard & Poor's 500.

Find out more about information ratio...

To understand the information ratio, it helps to understand tracking error. Find out more with our guide.