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Home Depot Information Ratio All EquitiesStocksUSA Stock Home Depot

Home Depot has current Information Ratio of (0.15). The Information Ratio is the ratio of the alpha component of total returns to the standard deviation of these excess alpha returns. The alpha component is the return that is attributable to the manager skill to time the market and is the residual after taking out the risk free return and the beta components from the total returns. While the Sharpe ratio considers the standard deviation of the total returns, the information ratio considers the variability of only the alpha component of the return (which also forms the numerator). In other words, the information ratio is merely Jensen alpha divided by its standard deviation.

INFOR   =  ER[a] - ER[b]  STD[a]

=

(0.15)

ER[a]	=	Expected return on investing in Home Depot
ER[b]	=	Expected return on market index or selected benchmark
STD[a]	=	Standard Deviation of returns on Home Depot

Information Ratio Comparison

The higher the information ratio, the greater the chances of the manager to make money in the future. The information ratio only looks to compute the return per unit of risk undertaken for the alpha component. This is important because alpha returns are risky, as they represent a zero sum game for the market as a whole. In fact, average alpha for the market as a whole is in practice slightly less than zero because of transaction and other costs. Therefore it is easy for a manager to take on ?alpha risk? and lose money that will bite into the beta returns.

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