Which ratio helps assess how well a portfolio outperforms a benchmark, considering the volatility of the benchmark?

The Information Ratio is a measure that assesses a portfolio's return over the benchmark return, adjusted for the volatility of the benchmark. This ratio effectively evaluates the performance of a portfolio manager by considering how much active return (the excess return above a benchmark) they generate per unit of risk (the tracking error or volatility of that excess return).

By using the Information Ratio, investors can determine how consistently a portfolio outperforms its benchmark, which is crucial for assessing the skill of the portfolio manager. A higher Information Ratio indicates that the portfolio manager has achieved better performance relative to the risks taken, specifically the risks associated with deviating from the benchmark.

The other ratios serve different purposes; for instance, the Sharpe Ratio measures performance as it relates to risk-free investments, while the Treynor Ratio focuses on systematic risk compared to the market. The Sortino Ratio is similar to the Sharpe Ratio but distinguishes between upside and downside volatility, focusing only on harmful volatility. Thus, these ratios do not specifically measure the relationship between portfolio performance and benchmark volatility in the same way as the Information Ratio.