What does a lower Information Ratio indicate?

The Information Ratio is a measure used to evaluate the risk-adjusted performance of an investment portfolio compared to a benchmark. It is calculated by taking the excess return of the portfolio over the benchmark and dividing it by the tracking error, which is the standard deviation of the excess return.

When the Information Ratio is lower, it indicates that the portfolio's relative performance compared to the benchmark is not as strong. Essentially, a lower Information Ratio suggests that the excess returns generated by the portfolio are less significant when adjusted for the risk taken. This means that investors are receiving less return for the amount of risk they are taking compared to the benchmark, indicating a weaker performance relative to the benchmark.

Higher active risk, greater market volatility, and higher average returns would not correlate directly with a lower Information Ratio, as these factors can affect the calculation but do not inherently explain the performance relationship represented by the ratio. The key takeaway regarding a lower Information Ratio is that it signifies diminished relative performance compared to the benchmark, highlighting potential issues with the efficiency or effectiveness of the investment strategy being employed.