The Information Ratio

Despite the widespread use of information ratios to gauge the performance of active money managers, confusion persists over how to calculate an information ratio, how to interpret it, and what constitutes a “good” one. The argument here is that the simplest form and interpretation of the ratio is the most useful for investors. This article clarifies the relationship between an information ratio and a t-statistic, compares four methods of annualizing an information ratio, and presents the empirical evidence on the distribution of information ratios by style, which provides a context in which to examine manager performance.