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Alpha, Information Ratio, and Tracking Error

Alpha, information-ratio, Jensen's alpha, and tracking-error terms used in active-risk evaluation.

Alpha, Information Ratio, and Tracking Error terms measure portfolio return, attribution, benchmark-relative results, tracking error, and risk-adjusted performance.

Use this branch when the question depends on how performance was calculated, attributed, benchmarked, or adjusted for risk.

Key Terms in This Branch

TermUse it for
AlphaReturn calculation, attribution, benchmark, capture ratio, tracking error, alpha, Sharpe, Sortino, Treynor, or risk-adjusted performance terms.
Alpha GenerationReturn calculation, attribution, benchmark, capture ratio, tracking error, alpha, Sharpe, Sortino, Treynor, or risk-adjusted performance terms.
Information Ratio (IR)Return calculation, attribution, benchmark, capture ratio, tracking error, alpha, Sharpe, Sortino, Treynor, or risk-adjusted performance terms.
Jensen’s AlphaReturn calculation, attribution, benchmark, capture ratio, tracking error, alpha, Sharpe, Sortino, Treynor, or risk-adjusted performance terms.
Tracking ErrorReturn calculation, attribution, benchmark, capture ratio, tracking error, alpha, Sharpe, Sortino, Treynor, or risk-adjusted performance terms.

What to Check

Check the return formula, cash-flow timing, benchmark, fee treatment, reference rate or hurdle rate input, volatility period, attribution model, currency, and whether performance is gross, net, historical, or hypothetical.

Common Mistakes

  • Comparing money-weighted and time-weighted returns as if they were the same.
  • Reading alpha without checking benchmark and risk exposure.
  • Ignoring fees, cash flows, taxes, and survivorship bias.
  • Treating a high ratio as proof a strategy is suitable.

This page is educational and does not recommend a specific portfolio, security, fund, tax treatment, or account choice.

In this section

Choose a subsection first. Deeper term pages live inside each subsection, which keeps large topic hubs readable.

Alpha

Alpha represents an investment's performance relative to a benchmark index, indicating the active return on investment compared to the market.

Alpha Generation

Alpha generation refers to the ability to achieve investment returns exceeding a market index's benchmark return, adjusted for risk.

Information Ratio (IR)

The information ratio measures active return per unit of tracking error to evaluate benchmark-relative manager skill.

Jensen's Alpha

Jensen's Alpha is a metric that evaluates a portfolio's return above the expected return predicted by the Capital Asset Pricing Model (CAPM).

Tracking Error

Tracking error measures the volatility of active return between a portfolio and its benchmark.

Revised on Sunday, June 21, 2026