[Verse 1] Portfolio managers hunt for alpha every trading day But measuring their talent takes a smarter way Information ratio tells the whole story Excess return divided by tracking error's glory [Chorus] IR equals alpha over tracking error's might Sharpe ratio's cousin shining analytical light Standard deviation of the difference you see How much the portfolio strays from benchmark's decree [Verse 2] Tracking error measures active risk you take Standard deviation of returns for alpha's sake Portfolio minus benchmark, quarter after quarter Calculate the variance, then find the square root's order [Chorus] IR equals alpha over tracking error's might Sharpe ratio's cousin shining analytical light Standard deviation of the difference you see How much the portfolio strays from benchmark's decree [Bridge] Higher ratios signal skill that's truly rare Point five is decent, one point zero's beyond compare Consistency matters more than lucky streaks Tracking error shows if manager's technique is weak [Verse 3] Low tracking error means you hug the index tight High tracking error swings from benchmark's sight Information ratio separates the wheat from chaff Skill-based alpha from a random photograph [Chorus] IR equals alpha over tracking error's might Sharpe ratio's cousin shining analytical light Standard deviation of the difference you see How much the portfolio strays from benchmark's decree [Outro] Active management's crystal ball revealed at last Tracking error and IR separate future from past
← Treynor Ratio and Jensen's Alpha | Sortino Ratio and Downside Risk →