Explain To Me the Fundamental Law of Active Management having, material, equation, difficult

cfa10yrplan

I can spit out the equation, but I am having a difficult time understanding and tethering this to other material.

mik82

kingstongal Wrote:
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> The information coefficient (IC) basically tells
> you how good the manager is at predicting alpha
> (so a high correlation between predicted and
> actual alpha would indicate a high IC). Breadth
> refers to the number of stocks covered. If you
> increase the universe of stocks covered, you will
> be increasing breadth but not necessarily IC.


Ooooops! My bad, I think I am starting to get totally confused....having an evening off studying today - much needed I'd say!



Edited 2 time(s). Last edit at Wednesday, May 25, 2011 at 02:16PM by kingstongal.

oneboy

kingstongal Wrote:
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> Breadth
> refers to the number of stocks covered. If you
> increase the universe of stocks covered, you will
> be increasing breadth but not necessarily IC.

No. Breadth refers to the independent investment decisions taken, not stocks covered, so if you
- buy all retails stocks since you think the sector as a whole will do well, it counts as one breath.
- cover all retail stocks, but is constrained by not allowed to short stocks --> your breath is limited since you know certain stocks will go down in your coverage, but you can't short it --> not count as breadth.

NakedPuts2011

It means that Information Ratio depends on how many decisions a manager is taking and how many assets the manager is following. Thats the layman answer I am going to give.