Information ratio is the ratio comparing the active returns on a portfolio with that on its benchmark index, adjusted against active risk, where active risk is the volatility of the active returns.
Information ratio is calculated with:-
IR is the information ratio
Rp is the return on the portfolio
Rb is the return on the benchmark
STD(Rp-Rb) is the standard deviation of the difference of returns on the portfolio and on the benchmark, which we call active risk
The information ratio is a way to measure the consistency of active returns, as most investors would prefer a consistently generated value (meaning it has a low active risk), rather than a lumpy active returns pattern (with high active risk).
IR is used to measure an active management’s efficiency. A high IR represents a consistently well-performing investment fund.