Information Ratio Calculator

Information ratio measures active management skill: active return / tracking error. 1% excess return with 3% tracking error = IR 0.33 (modest skill). 2% excess with 2% TE = IR 1.0 (excellent). IR > 0.5: good. IR > 1.0: top decile. Negative: underperforming benchmark.

Example: portfolio returns 13% vs benchmark 11% (active return 2%). Tracking error 2%. Information ratio = 1.0. Excellent active management - beating benchmark by meaningful margin with controlled deviation. IR is typically interpreted relative to peer managers, where an IR above 0.5 sustained over 5+ years is often read as a signal of genuine skill rather than luck.

IR limitations: (1) Short-term IR misleading (2-3 year results often luck). Need 5-10 years for skill assessment. (2) Survivorship bias inflates reported IRs. (3) Style drift confuses interpretation. (4) Doesn't capture downside skewness (manager could have IR 1.0 but deliver disasters in tail events). IR is commonly read alongside Sharpe, max drawdown, and a qualitative assessment of the manager's process. Some quantitative funds have reportedly sustained IR above 2.0 over long periods, while active-manager IRs are more often reported below 0.5.

A worked example

With the defaults: portfolio return of 13%, benchmark return of 11%, tracking error of 2%. The tool returns 1.00. You can adjust any input and the result updates as you type — no submit button, no reload. That's the real power here: seeing how sensitive the output is to one or two assumptions.

What moves the number most

The result responds to Portfolio Return %, Benchmark Return %, and Tracking Error %. Not every input has equal weight. Adjusting one input at a time toward extreme values shows which ones move the result most.

The formula behind this

Information ratio = active return / tracking error. Everything the calculator does is shown in the formula box below, so you can check the math against your own spreadsheet if you want.

Where this fits in planning

This is a "what-if" tool, not a forecast. It helps to test ideas: what happens to the information ratio if the portfolio return comes in lower than hoped, or if tracking error runs higher than planned. The value is in the scenarios you run across the three inputs, not the single answer the defaults produce.

What this doesn't capture

This is a simplified model that holds its assumptions constant. Real outcomes vary with market conditions, costs, taxes, and timing, so the figure is best read as one scenario rather than a forecast.