Information Ratio and Tracking Error

How Strategy Briefer balances expected active return against active risk.

Category: Portfolio

Tracking error

Tracking error measures volatility of active return: TE = stdev(portfolio return - benchmark return). It is the risk budget for deviating from the benchmark.

Information ratio

Information ratio divides active return by tracking error: IR = mean(active return) / tracking error, usually annualized for comparison. A high IR means the active risk is being compensated.

Agent use

Strategy Briefer uses IR and tracking error to choose sleeves that are not only high-return but efficient relative to the benchmark.