Information Ratio
Alpha per unit of active risk — how consistently you beat the benchmark.
The Information Ratio (IR) measures consistency of outperformance: it's alpha divided by tracking error. High IR means you beat the benchmark consistently without wild swings; low IR means erratic results. Benchmarks: IR > 0.5 is good (difficult to achieve), IR > 0.75 is excellent, IR > 1.0 is exceptional. Why it's hard: Achieving IR > 0.5 means generating 5% alpha with 10% tracking error, or 2% alpha with 4% tracking error — both are tough. Compare to Sharpe ratio (total return / total risk): IR measures active return per active risk, while Sharpe measures total return per total risk. For index-hugging managers, IR is more relevant than Sharpe — it isolates the value-add from deviating from the benchmark.
Formula