Information Ratios | Ratio Calculation
Information Ratios | Ratio Calculation Formula
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:
Related formulas:
| Where | Equals |
| IR | Historical information ratio |
| __ | Average value of ERt over the historical period |
|
| 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 |
ERFor over 1,000 additional terms and definitions please see our Investment Glossary Guide.
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