Ultimate access to all questions.
Explanation:
Grinold's fundamental law of active management states that:
Information Ratio (IR) = Information Coefficient (IC) × √Breadth
Where:
This formula shows that to maximize the information ratio, investors can either:
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:
The fundamental law demonstrates that both skill (IC) and opportunity (breadth) are important for successful active management.
No comments yet.
Following Grinold's fundamental law of active management, one should find:
A
Sector allocation is the most important factor in active management.
B
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.
C
A small number of investment bets decreases the chances of making a mistake and, therefore, increases the expected investment performance.
D
Investors should focus on increasing only their predictive ability relative to stock price movements.