FRM Part II · FRM Exam Part II · Portfolio Construction
A manager's skill (information coefficient) stays at 0.04, and she wants to double her information ratio under the basic fundamental law by adding independent bets of equal quality. If she currently makes 50 independent bets per year, how many independent bets per year does she need?
She needs 200 independent bets. Because the information ratio is proportional to the square root of breadth when skill is unchanged, doubling the ratio requires quadrupling the number of independent bets, from 50 to 200. Simply doubling the bets would raise the ratio only about 41%.
- A100
- B141
- C200Correct
- D250
Explanation
IR scales with the square root of breadth, so doubling IR requires quadrupling breadth: 50 x 4 = 200. Option 100 is the error of doubling breadth, which raises IR only by a factor of about 1.41. Option 141 is the breadth-times-sqrt(2) confusion.
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