Active manager skill.

Information ratio measures active management skill: active return / tracking error. 1% excess return with 3% tracking error = IR 0.33 (modest skill). 2% excess with 2% TE = IR 1.0 (excellent). IR > 0.5: good. IR > 1.0: top quartile. Negative: underperforming benchmark.

Example: portfolio returns 13% vs benchmark 11% (active return 2%). Tracking error 2%. Information ratio = 1.0. Excellent active management - beating benchmark by meaningful margin with controlled deviation. Compare against peer managers - IR > 0.5 over 5+ years signals genuine skill, not luck.

IR limitations: (1) Short-term IR misleading (2-3 year results often luck). Need 5-10 years for skill assessment. (2) Survivorship bias inflates reported IRs. (3) Style drift confuses interpretation. (4) Doesn't capture downside skewness (manager could have IR 1.0 but deliver disasters in tail events). Use IR alongside Sharpe, max drawdown, and qualitative assessment of manager process. Renaissance Technologies famously IR > 2.0 for decades; most active managers under 0.5.

A worked example

Try the defaults: portfolio return of 13%, benchmark return of 11%, tracking error of 2%. The tool returns 1.00. You can adjust any input and the result updates as you type — no submit button, no reload. That's the real power here: seeing how sensitive the output is to one or two assumptions.

What moves the number most

The result responds to Portfolio Return %, Benchmark Return %, and Tracking Error %. Not every input has equal weight. Flip one at a time toward extreme values to feel which ones move the needle most for your situation.

The formula behind this

Information ratio = active return / tracking error. Everything the calculator does is shown in the formula box below, so you can check the math against your own spreadsheet if you want.

Where this fits in planning

This is a "what-if" tool, not a forecast. Use it to test ideas before committing: what happens if the rate is 2% lower than hoped, what happens if you add five more years. The value is in the scenarios you run, not the single answer you get from the defaults.

What this doesn't capture

Steady-rate math ignores real-world volatility. Actual returns are lumpy; sequence-of-returns risk matters most in drawdown; fees and taxes drag on compound growth; and behaviour changes in drawdowns can reduce outcomes below the projection. Treat the number as one scenario, not a forecast.