Information Ratio

The Information Ratio (IR) is to active managers what Sharpe is to absolute-return investors: a single number that measures excess return per unit of risk taken, where "risk" is defined as drift from the benchmark. Where Sharpe uses total volatility, IR uses Tracking Error.

Formula

IR = ( R_p − R_b ) / TE      = α / TE

where α and TE are the annualised excess return and tracking error of the portfolio against the benchmark.

Interpretation

• ·IR < 0 — manager destroys value vs the benchmark.
• ·IR 0-0.5 — typical for the median active mutual fund.
• ·IR 0.5-0.75 — "good" active manager.
• ·IR 0.75-1.0 — top quartile, the "stars".
• ·IR > 1.0 — sustained over 5+ years is rare and usually points to a true edge or a small sample.

Grinold's Fundamental Law

Richard Grinold (1989) decomposed the Information Ratio into IR ≈ IC × √Breadth, where IC is the information coefficient (correlation between forecasts and outcomes) and Breadth is the number of independent investment decisions per year. Practical takeaway: a manager with a modest forecasting edge (IC = 0.05) can still deliver a competitive IR if they make many independent bets.

How MEDGE Capital uses Information Ratio

IR is reported in the Compare report next to Sharpe, Sortino, Calmar and Tracking Error. The Compare module supports multi-benchmark comparison so a portfolio can be evaluated against several reference indices simultaneously.