Information Ratio

A statistic that seeks to summarize the mean-variance properties of an active portfolio with a single number. The information ratio builds on the Markowitz mean-variance paradigm, which says that the mean and variance (or, equivalently, the mean and standard deviation) of returns are sufficient statistics for characterizing an investment portfolio.

In Russell Style Classification (RSC), the information ratio is calculated as follows:

Formula for Information Ratio

Related formulas:

Formula for Average Excess Return

Formula for Excess Return

Formula for Estimated Standard Deviation

Where   

Equals

IR

Historical information ratio

    __
ER

Average value of ERt over the historical period
from t=1 through T

Estimated Standard DeviationER

Estimated standard deviation over the same period

ERt

Differential or excess return in period t

Rpt

Return on an active portfolio in period t

RBt

Return on a benchmark portfolio or security in period t