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FRM Part II · FRM Exam Part II · VaR and Risk Budgeting in Investment Management

A portfolio manager has an information coefficient (IC) of 0.05, makes 100 independent, equally weighted bets per year, and assumes the basic Fundamental Law of Active Management holds. What is the expected information ratio?

The expected information ratio is 0.50. Under the basic Fundamental Law, IR equals the information coefficient times the square root of breadth, so 0.05 times the square root of 100, which is 10, gives 0.50.

  1. A0.05
  2. B0.50Correct
  3. C0.005
  4. D5.00

Explanation

IR = IC x sqrt(breadth) = 0.05 x sqrt(100) = 0.05 x 10 = 0.50. Using 0.05 alone ignores breadth, and using breadth of 100 without the square root gives 5.00.

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