Chartered Market Technician Practice Exam 2025 – Complete Prep Guide

The Information Ratio is a measure that assesses the performance of an investment relative to a benchmark, factoring in the risk taken to achieve that performance. It is defined as the excess return of a portfolio (or an active investment strategy) over the return of a benchmark divided by the tracking error, which is the standard deviation of the excess return.

This ratio is particularly useful for evaluating the effectiveness of a portfolio manager's investment decisions compared to a designated benchmark, as it highlights how much additional return, or alpha, is generated per unit of risk assumed (variation from the benchmark). A higher Information Ratio indicates that the portfolio manager is delivering excess returns with less volatility related to the benchmark, suggestive of effective investment choices.

The other options, while related to performance metrics, do not encapsulate the definition of the Information Ratio. The first option refers to alpha divided by total return, which does not accurately represent how efficiency against a benchmark is quantified. The third option speaks to beta, which measures systematic risk rather than relative performance against a benchmark. The last option incorrectly combines concepts of the Sharpe Ratio with market volatility without aligning with the fundamental calculation of the Information Ratio.