Answer: To maximize the information ratio, active investors need to either have high-quality predictions or place a large number of investment bets in a given year.

## Explanation Grinold's fundamental law of active management states that: **Information Ratio (IR) = Information Coefficient (IC) × √Breadth** Where: - **Information Ratio (IR)** measures the risk-adjusted performance of active management - **Information Coefficient (IC)** represents the quality of predictions (skill) - **Breadth** represents the number of independent investment bets This formula shows that to maximize the information ratio, investors can either: 1. **Improve their predictive ability (IC)** - higher quality predictions 2. **Increase the number of independent bets (Breadth)** - more opportunities to apply skill Option B correctly captures this relationship: "To maximize the information ratio, active investors need to either have high-quality predictions or place a large number of investment bets in a given year." **Why other options are incorrect:** - **Option A**: Sector allocation is not specifically emphasized in Grinold's fundamental law - **Option C**: A small number of bets actually decreases breadth, which reduces the information ratio according to the formula - **Option D**: Focusing only on predictive ability ignores the importance of breadth in the formula The fundamental law demonstrates that both skill (IC) and opportunity (breadth) are important for successful active management.

Author: LeetQuiz .