It represents the additional amount of return that an investor receives per unit of increase in risk.
[1] The information ratio is simply the ratio of the active return of the portfolio divided by the tracking error of its return, with both components measured relative to the performance of the agreed-on benchmark.
is the standard deviation of the active return, which is an alternate definition of the aforementioned tracking error.
Some analysts, however, do use Jensen's alpha for the numerator and a regression-adjusted tracking error for the denominator (this version of the information ratio is often described as the appraisal ratio to differentiate it from the more common definition).
[3] Top-quartile investment managers typically achieve annualized information ratios of about one-half.
Generally, the information ratio compares the returns of the manager's portfolio with those of a benchmark such as the yield on three-month Treasury bills or an equity index such as the S&P 500.
[5] Some hedge funds use Information ratio as a metric for calculating a performance fee.
A better measure of the alpha produced by the manager is the Geometric Information Ratio[citation needed].