Information Ratio - Characteristics of Information Ratio

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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