Before revision:  This paper proposes  the Generalized Information Ratio (GIR) to evaluate the performance of active portfolios under misspecified models . Motivated by the theoretical link between abnormal returns and residual covariance matrix, GIR is derived as alphas scaled by the inverse square root of the residual covariance matrix (GIR = \Sigma ^(-1/2) \alpha ).
After revision: Alpha-based performance evaluation may fail to capture correlated residuals due to model errors. This paper proposes the Generalized Information Ratio (GIR) to evaluate the performance of active portfolios under misspecified models . Motivated by the theoretical link between abnormal returns and residual covariance matrix, GIR is derived as alphas scaled by the inverse square root of the residual covariance matrix (GIR = \Sigma ^(-1/2) \alpha ).