How is the IR worked out?
Each week, take the stock’s return minus its benchmark’s return. That gap is the active return: the stock’s lead, or lag, that week.
- Average the weekly leads.
- Measure how much they swing around that average. This is the tracking error.
- Divide the average by the swing.
IR = average active return ÷ tracking error. Weekly figures are usually scaled to a yearly one by multiplying by the square root of 52 (about 7.2).
Illustrative: each bar is one week’s return minus the market’s; the dashed line is the average. Both stocks have the same average lead, but the steady one has the higher Information Ratio because its lead swings far less.
A worked example
| Stock | Average weekly lead | Weekly swing (tracking error) | Yearly IR |
|---|---|---|---|
| Stock A | 0.3% | 1.5% | 0.3 ÷ 1.5 × 7.2 ≈ 1.44 |
| Stock B | 0.3% | 4.5% | 0.3 ÷ 4.5 × 7.2 ≈ 0.48 |
| Stock C | 0.6% | 6.0% | 0.6 ÷ 6.0 × 7.2 ≈ 0.72 |
C had the biggest average lead, yet A has the highest IR: A beat the market by a little nearly every week. A negative IR means the stock lagged on average; near zero means no steady lead either way.
The Sharpe ratio is a cousin: it divides return above a risk-free rate by total volatility. The IR asks a narrower question: did the stock beat its market consistently?
How does Chart in Motion calculate it?
- Weekly returns from each week’s last close, every week counted equally.
- A regional benchmark: a large-company index for each market, one for US stocks and one for Indian stocks.
- 2 windows: the past 3 months and the past 12 months.
- Enough data first: at least 10 weekly returns for 3 months and 40 for 12 months. Weeks spanning a trading halt are left out, and a stock with out-of-date prices is skipped. The app then shows a dash.
How do you read IR3 and IR12?
The app turns raw IRs into ranks from 0 to 100: the share of stocks in the same region with a lower IR. An IR12 of 85 means its 12-month IR is higher than that of 85% of stocks in its region. The columns are named 3-month momentum (IR3) and 12-month momentum (IR12).
- Both high: a steady lead over the year that is still in place.
- IR12 high, IR3 low: a long lead that has faded recently.
- IR3 high, IR12 low: recent strength after a weaker year.
- Both low: the stock lagged, or moved erratically.
What are its limits?
- It looks back. It describes the past window, not the future.
- It is relative. In a falling market, a stock can rank high by falling less than its index.
- Short windows are noisy. One big week can sway 13 weekly returns, so IR3 moves more than IR12.
- The benchmark matters. A small company measured against a large-company index can look steady or erratic for reasons unrelated to the business.
Chart in Motion does not make buy, sell or hold calls. IR3 and IR12 are measurements, not recommendations.
See it in the app
Add the 3-month and 12-month momentum columns to a watchlist and sort by either. In a sector-grouped list, that shows the leaders within each sector. On desktop, the screener can filter by IR3 or IR12 with valuation and profit measures. More on the features page.