The higher the information ratio, the better. If the information ratio is less than zero, it means the active manager failed on the first objective of outperforming the benchmark. ... Generally speaking, an information ratio in the 0.40-0.60 range is considered quite good.
Is a higher or lower information ratio better?
What Is a Good Number? The higher the information ratio, the better . If the information ratio is less than zero, it means the active manager failed on the first objective of outperforming the benchmark.
What does the information ratio tell us?
The information ratio identifies how much a fund has exceeded a benchmark . Higher information ratios indicate a desired level of consistency, whereas low information ratios indicate the opposite.
What does Sharpe ratio tell you?
Definition: Sharpe ratio is the measure of risk-adjusted return of a financial portfolio . A portfolio with a higher Sharpe ratio is considered superior relative to its peers. ... If two funds offer similar returns, the one with higher standard deviation will have a lower Sharpe ratio.
Is a negative information ratio bad?
The Information Ratio measures the regularity and dependability in a manager’s ability to generate active return. ... A negative Information Ratio is obviously bad as it indicates that the portfolio’s return is less than the benchmark return and thus Active Return is negative.
What is a bad information ratio?
If the information ratio of a mutual fund is negative, it indicates that the mutual fund manager was unable to produce any excess returns at all . An information ratio of less than 0.4 means that the mutual fund could not produce excess returns for a sufficiently long time and the fund may not be a good investment.
How do you interpret tracking errors?
Tracking error is the standard deviation of the difference between the returns of an investment and its benchmark. Given a sequence of returns for an investment or portfolio and its benchmark, tracking error is calculated as follows: Tracking Error = Standard Deviation of (P – B)
What is a good tracking error?
Theoretically, an index fund should have a tracking error of zero relative to its benchmark. Enhanced index funds typically have tracking errors in the 1%-2% range. Most traditional active managers have tracking errors around 4%-7%.
Is information ratio risk adjusted return?
Both ratios determine the risk-adjusted returns of a security or portfolio. However, the information ratio measures the risk-adjusted returns relative to a certain benchmark while the Sharpe ratio compares the risk-adjusted returns to the risk-free rate.
How is information ratio calculated?
Description: Information ratio is useful in comparing a group of funds with similar management styles. It is calculated by dividing the active return of a portfolio by the tracking error . The tracking error is calculated as the standard deviation of the difference between fund return and index return.
What is a bad Sharpe ratio?
A Sharpe ratio of 1.0 is considered acceptable. A Sharpe ratio of 2.0 is considered very good. A Sharpe ratio of 3.0 is considered excellent. A Sharpe ratio of less than 1.0 is considered to be poor.
Is it better to have a higher or lower Sharpe ratio?
Usually, any Sharpe ratio greater than 1.0 is considered acceptable to good by investors. A ratio higher than 2.0 is rated as very good. A ratio of 3.0 or higher is considered excellent.
What does a Sharpe ratio of 0.5 mean?
As a rule of thumb, a Sharpe ratio above 0.5 is market-beating performance if achieved over the long run . A ratio of 1 is superb and difficult to achieve over long periods of time. A ratio of 0.2-0.3 is in line with the broader market.
Is information ratio always positive?
Mathematical Definition
Thus, if their portfolio return is in excess of the benchmark, they are considered to add value over the considered time period and the information ratio will be positive . A negative information ratio will denote a portfolio manager or trader who has lost value relative to the benchmark.
Can tracking error negative?
Tracking difference, which can be positive or negative, tells you the extent to which a fund has out- or underperformed its benchmark index. ... Because a fund’s NAV total return includes fund expenses, tracking difference typically is negative for index funds .
Which of the following factors is part of the information ratio?
Risk free rate Tracking error Standard deviation of benchmark returns .
