Which statement accurately describes the information ratio?

The information ratio is indeed a reward-to-risk ratio, making it a valuable tool for assessing the performance of an investment relative to a benchmark. This ratio quantifies the excess return generated by an investment (often an actively managed portfolio) above a benchmark index, adjusted for the volatility of those excess returns. By comparing the returns earned in excess of the benchmark to the amount of risk (measured as tracking error), investors can determine how effectively their chosen investment manager is adding value compared to simply holding the benchmark. A higher information ratio indicates a more efficient use of risk to generate returns, which is desirable for investors seeking to maximize returns while minimizing unnecessary risk.

In contrast, the other statements provide either incomplete or inaccurate reflections of what the information ratio represents. While it is technically possible for the information ratio to be negative, it is not always positive; moreover, investors seek larger information ratios, as a higher value indicates better risk-adjusted performance. Additionally, while volatility is a component of the ratio in terms of tracking error, the ratio itself does not measure volatility directly as the primary focus, but rather the effectiveness of that volatility in generating excess returns compared to the benchmark.