The information ratio is a measure used to evaluate the performance of an investment by comparing its excess returns to its tracking error, essentially assessing how much additional return an investor earns for each unit of risk taken. It connects to portfolio diversification by helping investors understand the effectiveness of alternative investments in achieving superior returns relative to their risks. A higher information ratio indicates better performance relative to a benchmark, making it a vital tool for analyzing historical performance and risk-return profiles of various asset classes, including alternatives.
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