Information Ratio An information ratio measures the relative efficiency of a portfolio compared to a benchmark. It is calculated by comparing the ratio of t...
Information Ratio
An information ratio measures the relative efficiency of a portfolio compared to a benchmark. It is calculated by comparing the ratio of the portfolio's expected return to its standard deviation.
For example, if a portfolio has an information ratio of 1.5, it means that the portfolio's expected return is 15% higher than its standard deviation. This means that the portfolio is more efficient than a portfolio with an information ratio of 1, which would have the same expected return but a lower standard deviation.
Sortino Ratio
The Sortino ratio is a measure of the risk-adjusted return of a portfolio compared to a benchmark. It is calculated by comparing the ratio of the portfolio's expected return to its maximum potential drawdown.
For example, if a portfolio has a Sortino ratio of 1.2, it means that the portfolio's expected return is 120% higher than the maximum potential drawdown. This means that the portfolio is more risky than a portfolio with a Sortino ratio of 0.8, which would have the same expected return but a higher maximum potential drawdown.
In conclusion, the information ratio and Sortino ratio are both useful measures of portfolio efficiency and risk. By understanding these ratios, investors can make more informed decisions about their investments