question

How to achieve higher information ratios?

answer

We need to understand the *fundamental law of active management*

question

The *fundamental law of active management*:

answer

a manager's IR can be estimated using two attributes of her strategy: *skill* and *breadth*

question

Skill:

answer

is represented by the manager's *information coefficient*, which represents the correlation between her residual return forecasts and subsequent results (actual residual returns)

question

Breadth:

answer

the number of independent forecasts of exceptional return that a manager makes *per year* !!NOT dependent forecasts

question

The fundamental law is additive in the squared IRs:

answer

Overall IR^2 = IRA^2 + IRB^2 + IRC^2

Unlock the answer

question

IC common:

answer

?: the correlation between the two information sources or managers ICcom: the skill level of the combined sources

Unlock the answer

question

3 assumptions of the fundamental law:

answer

(1) the manager has an accurate measure of his or her own skills and exploits information (2) the sources of information are independent (3) the skill level (IC) involved in forecasting each active bet (BR) is the same

Unlock the answer

Achieving Higher Information Ratios: The Fundamental Law of Active Management

Unlock all answers in this set

Haven't found what you were looking for?

Search for samples, answers to your questions and flashcards