Information Ratio Calculator — IR = α / Tracking Error
Measure a portfolio manager's skill with the information ratio: the active return (outperformance over the benchmark) divided by the tracking error (the consistency of that outperformance). Higher values indicate more skill per unit of active risk taken.
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Risk-adjusted active return — > 0.5 is good, > 1.0 is excellent
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Active return (α = Rp − Rb)
12% − 8% = 4 % - 2
Information Ratio
4 ÷ 4 = 1Active return per unit of tracking-error risk. > 0.5 is good; > 1.0 is excellent.
How does this calculator work?
The information ratio IR = (R_p − R_b) / TE divides active return (portfolio minus benchmark) by tracking error (consistency of that active return). Values above 0.5 are considered good; above 1.0 excellent. Enter portfolio return, benchmark return and tracking error to calculate IR.
Formula
How this is calculated
The information ratio (IR) divides the active return — portfolio return R_p minus benchmark return R_b — by the tracking error TE. Active return is often called alpha (α) in this context. Tracking error is the annualised standard deviation of the series of (R_p − R_b) differences measured over rolling periods, capturing how consistently the manager beats or lags the benchmark.
A positive IR means the portfolio beat the benchmark on a risk-adjusted basis; negative means it lagged. As a rough rule of thumb: IR > 0.5 is considered good, > 1.0 is excellent, and > 2.0 is outstanding for a sustained period — though thresholds vary by asset class and market environment. The IR is closely related to the Sharpe ratio, but uses active return and tracking error instead of excess return and total volatility.
Important limitations: the IR is sensitive to the measurement period (a lucky short run can look like skill), assumes active returns are normally distributed, and does not capture tail risk, factor exposures, or liquidity constraints. Always interpret the IR alongside other metrics such as the Sortino ratio, maximum drawdown, and factor-adjusted alpha before attributing results to manager skill.
Frequently asked questions
A sustained IR above 0.5 is generally considered good; above 1.0 is excellent. These are industry rules of thumb — the significance of any IR depends on how many independent periods are available. A high IR over a short period may reflect luck rather than skill.
The Sharpe ratio uses total return minus the risk-free rate divided by total return volatility. The IR uses active return (portfolio minus benchmark) divided by tracking error (volatility of the active return). The IR focuses specifically on benchmark-relative performance rather than absolute risk-adjusted return.
Tracking error is the annualised standard deviation of the differences between portfolio and benchmark returns across rolling periods (e.g. monthly differences over 3–5 years). A low tracking error means the portfolio closely follows its benchmark; a high tracking error means it deviates significantly.
Also known as
TG we-Calculate Editorial Team. (2026). Information Ratio Calculator — IR = α / Tracking Error [Online calculator]. TG we-Calculate. https://we-calculate.com/calculator/information-ratio-calculator
TG we-Calculate Editorial Team. "Information Ratio Calculator — IR = α / Tracking Error." TG we-Calculate. 2026. https://we-calculate.com/calculator/information-ratio-calculator.
TG we-Calculate Editorial Team, "Information Ratio Calculator — IR = α / Tracking Error," TG we-Calculate, 2026. [Online]. Available: https://we-calculate.com/calculator/information-ratio-calculator
@misc{wecalculate_information_ratio_calculator, title = {Information Ratio Calculator — IR = α / Tracking Error}, author = {{TG we-Calculate Editorial Team}}, howpublished = {\url{https://we-calculate.com/calculator/information-ratio-calculator}}, year = {2026}, note = {TG we-Calculate} }
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