Characteristics of Information Ratio
The main characteristics of the information ratio are as follows:
- The information ratio estimates ex-post value added and relates this to ex-ante opportunity available in the future.
- The residual frontier that describes the opportunities accessible to the active manager is identified by the information ratio.
- The level of aggressiveness for each manager is decided by his/her information ratio.
- Sometimes intuition can give a good clue about the information ratio and residual risk aversion.
- Value added depends on the managers’ prospects and aggressiveness.
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