Information Ratio

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Information Ratio

The ratio of annualized expected residual return to residual risk. A central measurement for active management, value added is proportional to the square of the information ratio.

Information Ratio

In statistics, a measure of expected return to risk as a standard deviation. The information ratio is used in active management to gauge a manager's performance against some benchmark. See also: Manager Universe.
References in periodicals archive ?
The value of information ratios is derived from calculating the return of the mutual fund subtracted by the benchmark return then divided by the standard deviation difference from the return of the fund and the market.
(2017) which used Sharpe, Jensen, Treynor, and Information Ratio methods, considering that the previous researches described only measured the performance with the Sharpe, Jensen, and Treynor methods.
Strategies were analyzed based on factors such as one-, three- and five-year performance, Sharpe ratios, information ratios, standard deviation, and upside market capture.
An analysis of the information ratios of the 10 Philippine bond funds in Table 5 shows that Coconut Fixed Income Fund once again has been able to sustain its dominance in the mutual funds space by being a top performer in terms of active portfolio management.
And this is the main reason why only these 3 funds have positive information ratios. For the 3-year returns, only Coconut Fixed Income Fund had a positive active return of 1.44%; hence, the 1.87 information ratio.
It introduces the beliefs, risks and processes of equity portfolio management, then covers portfolio theory, risk models and analysis, the evaluation of alpha factors, quantitative factors, valuation techniques and creation of value, multifactor alpha models, portfolio turnover and the optimal alpha model, advanced modeling, factor timing models, portfolio constraints and information ratios, transaction costs and portfolio implementation.
Table 4: Two-sample t-test for Information Ratios of Bank and Non-bank Funds [alpha] = 0.05 1999:Q2-2002:Q1 Bank Non-bank Mean information ratio 0.162 0.339 Variance 0.053 0.123 Observations 7 9 Hypothesised mean difference 0 Df 14 t statistic -1.215 P (T [less than or equal 0.122 to] t) one-tail t critical one-tail 1.761 P(T [less than or equal 0.245 to] t) two-tail t critical two-tail 2.145 2003:Q1-2004:Q3 Bank Non-bank Mean information ratio 0.256 0.058 Variance 0.188 0.164 Observations 5 7 Hypothesised mean difference 0 Df 8 t statistic 0.801 P(T [less than or equal 0.223 to] t) one-tail t critical one-tail 1.860 P(T [less than or equal 0.446 to] t) two-tail t critical two-tail 2.306 Source: Developed from Mercer (1999-2002) and S&P (2003-2004) data.
Intuitively, you should place a larger weight on strategies with higher information ratios and favorable diversification benefits.
We find it most useful to look at the historical information ratio.
This setup leads naturally to the use of information ratios (IR), as a performance measure, defined as the ratios of the portfolio excess return over his benchmark to its TEV.
Bertrand (2005, 2010) proves, by defining the IR as a forward-looking measure, that the information ratio is constant across all TEV efficient portfolios.
Since the information ratio indicates the level of excess return divided by the volatility incurred relative to the benchmark, it is an indicator of the potential persistency of alpha generation.
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