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Computational dynamics of information ratios

Author

Listed:
  • Auer, Benjamin R.
  • Marohn, Marcel

Abstract

The information ratio is one of the most important measures when choosing among investment funds. We show numerically and analytically that the classic single-index definition of this performance measure suffers from a computational defect which unfavorably affects investment decisions by singling out exceptionally good funds. Specifically, we highlight that high positive fund returns, which are in the best interest of the investors, can lead to suboptimal and even negative changes of the information ratio. Furthermore, we formally prove that fund managers have an incentive to target specific medium-sized returns because they generate the highest possible information ratio.

Suggested Citation

  • Auer, Benjamin R. & Marohn, Marcel, 2024. "Computational dynamics of information ratios," Economics Letters, Elsevier, vol. 236(C).
    • Handle: RePEc:eee:ecolet:v:236:y:2024:i:c:s0165176524000946
    DOI: 10.1016/j.econlet.2024.111611
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    More about this item

    Keywords

    Information ratio; Performance measurement; Regression; Outlier sensitivity;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C01 - Mathematical and Quantitative Methods - - General - - - Econometrics
    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics

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