FRM Part II · FRM Exam Part II · Portfolio Construction
A manager's strategy has IC of 0.04 and uses 100 independent bets per year, giving IR = 0.40. The manager wants to double the IR to 0.80 without changing skill per bet. Keeping IC fixed, how many independent bets per year are required?
The manager needs 400 independent bets. Because the information ratio rises with the square root of breadth, doubling it at constant skill requires quadrupling breadth, from 100 to 400, which gives 0.04 times 20 equals 0.80.
- A200
- B400Correct
- C800
- D141
Explanation
IR = IC x sqrt(BR). Doubling IR with fixed IC requires sqrt(BR) to double, so BR must quadruple: 100 x 4 = 400. Check: 0.04 x sqrt(400) = 0.04 x 20 = 0.80. The 200 option assumes breadth scales linearly. The 141 option scales breadth by sqrt(2), which is only the factor for a 41% IR increase.
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