Stock Market Glossary

information ratio

Key figure for the risk-adjusted excess return compared to a benchmark.

In brief: Key figure for the risk-adjusted excess return compared to a benchmark.

Meaning in practice

The information ratio divides the excess return by the tracking error. Values well above 0.5 are considered good – they show that activity was rewarded consistently, not just through luck.

Context for investors and traders

The term helps put market information into context. Its relevance depends on the instrument, investment horizon and current market situation, so it should be read with other data and a personal risk framework.

How to use this in practice

Use the term first to describe the situation and add verifiable data: time frame, benchmark, costs and liquidity. Only then does it become an assessment that can be connected to an investment objective and risk budget.

What to keep in mind

Avoid false precision. Many market terms describe probabilities or historical patterns; they neither guarantee a return nor replace the review of a specific security.

What does information ratio mean in simple terms?

Key figure for the risk-adjusted excess return compared to a benchmark.

When is this term relevant to investors?

Before acting, ask which assumption the term relies on and which information could disprove it. This prevents one metric or observation from receiving too much weight.

What should I check before acting on information ratio?

Avoid false precision. Many market terms describe probabilities or historical patterns; they neither guarantee a return nor replace the review of a specific security.

← Back to the glossary