Information ratio
Principles of Finance glossary · Principles Of Finance
Definition
Active return divided by tracking error.
Information ratio in plain English
Imagine a fund manager who tries to beat a benchmark like the S&P 500. Two things matter: how much extra return they earn above that benchmark (their "active return"), and how consistently they do it rather than getting lucky with wild swings (their "tracking error," a measure of how much their results bounce around relative to the benchmark). The information ratio divides the first by the second, so a high score means "beat the benchmark by a lot AND did it steadily." It's like grading a student not just on how far above the class average they scored, but on whether they hit that mark reliably every test instead of once by fluke, it rewards skill you can count on, not one-off luck.
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