Effect of cash on IR?

Gunther · May 25, 2018, 11:56am

I don’t understand why adding cash would cause a shrink in the information ratio of a portfolio of risky assests?

Tactics · May 25, 2018, 1:25pm

IR = active return / active risk The way I remember it, adding cash reduces active return (uninvested cash has no return). Another way to look at it is: IR = TC X IC X BR^0.5 If you hold cash, you reduce the number of uncorrelated bets (breadth). IC and TC are constant. So IR declines.

Gunther · May 31, 2018, 7:19am

This helps a lot, thank you!