Information ratio

Also seen as: IR, active return per unit of active risk

How is the information ratio calculated?

The information ratio divides the strategy's CAGR-based return above its parent Combined by the tracking error — the volatility of that same return difference. The numerator is the strategy's annualised (CAGR-based) return above the Combined, and the tracking error in the denominator is annualised the same way as volatility, by ×√252. High excess return earned smoothly scores well; the same excess earned erratically scores poorly.

where: strategy return and Combined return are the annualised, CAGR-based returns of the member strategy and of the Combined it sits inside, so the numerator is the strategy's excess return over the whole; and tracking error is the tracking error of that same return difference, annualised by ×√252. Both halves are annualised on the same basis, so the ratio is a plain number with no unit.

What counts as a good information ratio?

Higher is better: it means the strategy beats its parent Combined steadily rather than in occasional spikes. A value near zero means the strategy barely moves the Combined either way, and the sign follows the excess return — a strategy that consistently lags the whole has a negative information ratio.

Defaults in Fincanva

• Reported on the Strategy analytics table only, as the Information ratio column — one row per strategy inside a Combined. A strategy analysed on its own still gets a single row on that table, but it has no parent Combined to be measured against, so its information-ratio cell carries no meaning — read the column only for a strategy inside a Combined.
• Divides a strategy's CAGR-based excess return over its parent Combined by its √252-annualised tracking error.
• Measured against the parent Combined, not against a benchmark.
• A higher value reflects steadier outperformance of the whole; a near-zero value reflects a strategy that adds little either way.

Worked example

A member strategy returns 2% a year more than the Combined it belongs to. If it earns that 2% edge smoothly — a low tracking error of, say, 1% — its information ratio is about 2.0. If it earns the same 2% edge but erratically — a tracking error of 4% — the information ratio falls to about 0.5. The excess return is identical in both cases; what separates them is consistency, and the information ratio is the number that captures it.

These figures describe what a strategy would have done on historical data, not what it will do, and no information ratio is a target to aim for. Fincanva provides no financial advice — see Is this financial advice?.