Information Ratio

Information Ratio scores the chart symbol against a passive alternative, dividing its rolling mean active return by the variability of that same difference — a faithful rolling build of the information ratio. The Information Ratio line colors by sign with a gradient fill to zero, dashed references sit at the good and excellent levels, and a statistics table breaks the reading into benchmark, mean outperformance, deviation risk, beta and the annualization basis.

How to Trade the Information Ratio?

• Ratio above zero: the symbol is outperforming its benchmark over the window; below zero it is lagging. Crosses in both directions carry alerts.
• Reference levels: the dashed lines mark readings commonly quoted as good and excellent for sustained records, with crossing alerts.
• Table cross-check: a beta far from 1 means the symbol takes very different risk from its benchmark — where the two formulas part ways.

The reading only means something against the right yardstick, which is the discipline the validation family exists to enforce.

Information Ratio Settings

• Benchmark (default SP:SPX): the passive alternative; mismatch this and the ratio means nothing.
• Window Length (default 252): bars in the rolling mean and deviation.
• Formula (default Active Return / Tracking Error): the regression option divides alpha by residual risk instead.
• Return Type (default Simple): simple or logarithmic per-bar returns for both series.
• Annualize (default enabled) with Periods Per Year (default Auto) and Custom Periods Per Year (default 252): Auto infers the basis from average bar spacing.
• Good Level (default 0.5) and Excellent Level (default 1): the dashed references.
• Show Statistics Table (default enabled) with position and text-size options.

Frequently Asked Questions

How is this different from the Sharpe Ratio?

The Sharpe Ratio build grades returns against their overall volatility; this one grades outperformance against tracking error. One asks whether returns compensated risk at all, the other whether departing from the benchmark was worth it.

When should I switch to the regression formula?

When beta sits far from 1. The standard form charges the strategy for all benchmark-relative deviation, including plain leverage; alpha over residual risk isolates what selection added after the beta exposure is accounted for.

Why does my ratio swing so much?

A rolling window forgets: one strong or weak stretch dominates until it rolls out. Longer windows steady the reading at the cost of responsiveness; the table's window row shows the basis in use.