FRM Part II · FRM Exam Part II · Portfolio Construction
Under the basic Fundamental Law of Active Management, IR = IC x sqrt(BR). An analyst has an information coefficient of 0.05 and makes independent forecasts on 400 stocks once per year. What is the expected information ratio?
The expected information ratio is 1.00. Breadth is 400 independent bets, whose square root is 20, and multiplying by the information coefficient of 0.05 gives 1.00. Skill and breadth combine through the Fundamental Law.
- A0.50
- B1.00Correct
- C20.00
- D0.25
Explanation
sqrt(400) = 20, so IR = 0.05 x 20 = 1.00. The 0.50 option would result from using breadth of 100. The 20.00 option omits the IC. The 0.25 option is not derived from the data.
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