The Appraisal Ratio is simply another term for the Information Ratio. Based on the provided reference, this ratio is used to determine the risk-adjusted return of a financial security by comparing its performance against a benchmark index.
Understanding the Terms: Information Ratio and Appraisal Ratio
According to the provided information, the terms Information Ratio and Appraisal Ratio are synonymous. They refer to the same financial metric used in investment analysis.
The Purpose: Measuring Risk-Adjusted Return
As stated in the reference, the Information Ratio (or Appraisal Ratio) determines the risk-adjusted return of a financial security. This means it helps investors understand the return generated by an investment relative to the amount of risk taken.
How it Works: Comparing Performance to a Benchmark
The core function of the Information Ratio, as highlighted in the reference, is that it compares the performance of a security with the benchmark index. This comparison is crucial for evaluating how much excess return an investment has generated relative to a standard market index, adjusted for the volatility or risk associated with achieving that excess return.
Key Aspects of the Information Ratio (Appraisal Ratio)
- Synonymity: Appraisal Ratio is an alternative name for the Information Ratio.
- Purpose: It measures the risk-adjusted return of an investment.
- Calculation Basis: It involves comparing the performance of a security or portfolio to a benchmark index.
In essence, when someone refers to the Appraisal Ratio, they are talking about the Information Ratio, a key tool for evaluating the skill of an investment manager or the performance of a security relative to a benchmark, considering the risk involved.
