The formula to calculate the Information Ratio (IR) is:
\[ IR = \frac{PR - BR}{TE} \]
Where:
Let's say the portfolio return (\( PR \)) is 10%, the benchmark return (\( BR \)) is 8%, and the tracking error (\( TE \)) is 2%. Using the formula:
\[ IR = \frac{PR - BR}{TE} = \frac{10 - 8}{2} = 1 \]
So, the Information Ratio (\( IR \)) is 1.
The Information Ratio (IR) is a measure of portfolio performance relative to a benchmark, adjusted for the risk taken. It is calculated by dividing the difference between the portfolio return and the benchmark return by the tracking error. A higher Information Ratio indicates better risk-adjusted performance.
