Welcome back. In this lecture we will discuss about information ratio. Information ratio is also known as the appraisal ratio, because it is often used to gauge the skills of the fund managers of different mutual funds. Now, it measures the active Return of the managers portfolio divided by the amount of risk the manager takes relative to the benchmark. The important thing is the appraisal is against the benchmark that is how the benchmark is moving against that how well the fund manager is doing, whether he is beating the benchmark or whether he is lagging behind the benchmark. By benchmark we basically mean the index.
So, information ratio is basically a measure of the risk adjusted return of a financial security like a mutual fund. The formula for information ratio is Return of the asset minus the benchmark rate Turn divided by the standard deviation of the asset. Benchmark return basically means the return from the benchmark. We have seen this when we are doing the main calculation. so we can write IR is equal to ra minus RB divided by sigma. Let's see an example of how to calculate the information ratio.
By now you should be very familiar with this finished spreadsheet. So, we have calculated the returns on the market and we have calculated the returns from the mutual fund there is calculate the information ratio for this mutual fund. We will hide a few columns so that we have more visibility on the screen. So we are required to calculate RA, rb and standard deviation of the returns of the mutual fund. So we can find our age by doing average of the returns of the mutual fund. So we say average and we select the right We can calculate RV similarly as the average of all the returns from the market or from the benchmark we can find the standard deviation using the function St. Deb.
So we will apply st Deb and select the range as the returns of the mutual fund. Okay, so now we are ready to calculate the information ratio. Information ratio is calculated calculated as ra minus RB divided by standard deviation Thank you for listening See you in the next lecture.