The information ratio is a strategy's excess return over its parent Combined divided by its tracking error — a measure of how consistently the strategy outperforms the whole it belongs to. It is measured against the parent Combined, not against a benchmark: it asks whether a strategy's edge over the Combined is a steady contribution or an occasional lucky burst.
Also seen as: IR, active return per unit of active risk
How is the information ratio calculated?
The information ratio divides the strategy's CAGR-based return above its parent Combined by the tracking error — the volatility of that same return difference. The numerator is the strategy's annualised (CAGR-based) return above the Combined, and the tracking error in the denominator is annualised the same way as volatility, by ×√252. High excess return earned smoothly scores well; the same excess earned erratically scores poorly.
where: strategy return and Combined return are the annualised, CAGR-based returns of the member strategy and of the Combined it sits inside, so the numerator is the strategy's excess return over the whole; and tracking error is the tracking error of that same return difference, annualised by ×√252. Both halves are annualised on the same basis, so the ratio is a plain number with no unit.
What counts as a good information ratio?
Higher is better: it means the strategy beats its parent Combined steadily rather than in occasional spikes. A value near zero means the strategy barely moves the Combined either way, and the sign follows the excess return — a strategy that consistently lags the whole has a negative information ratio.
How does Fincanva handle it?
- Reported on the Strategy analytics page only, in its Each strategy, against the Combined card: one bar per strategy in the Information ratio column, drawn from zero so a negative value runs to the left of the baseline. A strategy analysed on its own still appears there, but it has no parent Combined to be measured against, so its information ratio carries no meaning — read it only for a strategy inside a Combined.
- Divides a strategy's CAGR-based excess return over its parent Combined by its √252-annualised tracking error.
- Measured against the parent Combined, not against a benchmark.
- A higher value reflects steadier outperformance of the whole; a near-zero value reflects a strategy that adds little either way.
What does it look like in practice?
A member strategy returns 2% a year more than the Combined it belongs to. If it earns that 2% edge smoothly — a low tracking error of, say, 1% — its information ratio is about 2.0. If it earns the same 2% edge but erratically — a tracking error of 4% — the information ratio falls to about 0.5. The excess return is identical in both cases; what separates them is consistency, and the information ratio is the number that captures it.
No information ratio is a target to aim for.