Perspectives : Information Ratios and Batting Averages

The information ratio (IR) and the batting average are two commonly quoted measures of investment success, but these measures have shortcomings: The IR contains no information about higher moments, and the batting average contains only directional information. This article demonstrates how the IR and batting average interact and how they can be usefully combined to allow investors to construct a comprehensive picture of the choices they face. The intriguing result is that large batting averages can result in low IRs and, conversely, impressive IRs can be obtained with low batting averages. Furthermore, in choosing between two managers with equivalent IRs, an investor who is averse to blowups should choose the manager with the lower batting average