The Information Ratio is a performance index that is "risk-adjusted ". It is described as the relationship between the Tracking Error (TE) of the fund and its Tracking Error Volatility:
Return of the fund;
Return of the benchmark;
The average difference between the fund and the benchmark;
The standard deviation of the different returns between the fund and the benchmark (Tracking Error Volatility);
In conclusion, the IR compares the performance of a fund and its benchmark and shows the ability of the fund manager in obtaining better results than the benchmark. The higher the value of IR, the more credit can be given to the fund manager. Unlike the Sharpe Index (please see explanation), the IR does not compare the performance of a fund to an operation that is free of risk, but instead to its main parameter of reference: its benchmark.
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