Manager A had a mean return of 10% and a tracking error of 8%, while for the same period manager B had a mean return of 5% and a tracking error of 4%. The mean return of the benchmark was -1%. Which manager performed better, based on the information ratio?

Explanation: A: (10% - (-1%))/8% = 1.375
B: (5% - (-1%))/4% = 1.5

The IR measures the increment in mean active return per unit of active risk. Manager B had lower returns but a better IR. A high ratio means a manager can achieve higher returns more efficiently by taking on additional risk, than one with a low ratio. Additional risk could be achieved through leveraging.