What does the Information Ratio measure?

The Information Ratio is a key performance measure used to evaluate the consistency of an investment manager's outperformance relative to a benchmark, adjusted for the risk taken. It specifically calculates the expected excess return (or outperformance) of an investment over its benchmark and divides this amount by the tracking error, which is the standard deviation of the excess returns.

By focusing on the ratio of the excess return to the tracking error, the Information Ratio provides insight into how effectively a portfolio manager is generating returns relative to the risk of deviating from the benchmark. A higher Information Ratio indicates that the manager is achieving greater outperformance for each unit of risk assumed. This makes it a valuable tool for investors who want to compare the skill of different managers or strategies while accounting for the risk they're taking.

Other options mentioned do not accurately describe what the Information Ratio measures. For instance, management fees, overall profit margins, and net income against total investment risk focus on different aspects of investment evaluation rather than the relationship between excess returns and risk relative to benchmarks, which is central to understanding the Information Ratio.