The information ratio measures the performance of an investment manager relative to a benchmark, adjusted for the risk taken by the manager. It's calculated by dividing the excess return of the portfolio over the benchmark (alpha) by the standard deviation of these excess returns. The information ratio provides insight into the manager's ability to generate consistent, risk-adjusted excess returns.
This ratio is particularly useful in evaluating the performance of active fund managers. A higher information ratio indicates a manager's skill in generating superior returns per unit of additional risk taken, relative to the benchmark. It's a valuable tool for comparing the performance of different managers and investment strategies.
While the information ratio is a helpful metric for assessing manager performance, it's important to consider it alongside other factors such as overall return, risk profile, investment style and economic conditions. The ratio depends on the chosen benchmark and different benchmarks may yield different results. It's most effective when used as part of a comprehensive investment analysis.
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