Calculating the Information Ratio from Monthly Returns

Summary

The note addresses whether an information ratio should use average monthly returns or cumulative monthly returns. Its answer recommends dividing the average monthly return by the standard deviation, pointing readers to an external response for further context.

The explanation is very brief: it does not specify whether returns should be active returns relative to a benchmark, how the standard deviation is calculated, or how to annualize the ratio. Those details matter in practice, so the note provides a starting rule rather than a complete calculation procedure.

Key ideas

• The response recommends using average monthly return divided by standard deviation.
• The note does not explain benchmark adjustment, annualization, or other implementation details.

Tags

# Calculation of Information Ratio


# Calculation of Information Ratio












When calculating an information ratio, should the average of monthly returns be used or the cumulative monthly returns be used?

Thanks!

## Answer by FFF (score 1)

https://quant.stackexchange.com/a/42315

You should use average monthly return over stddev.

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