Ch. 51: Information Coefficient: Practice Problem #14

Struggling with #14 on Ch. 51. The problem is clearly asking for the Information Coefficient (the correlation between the actual and forecasted active return) but I don’t believe the chapter goes into detail for how to actually use the formula (Equation 12 on p. 452). I’m not sure how CFAI is coming up with actual correlation figures here. Any help is greatly appreciated.

Anyone know the answer to this please?

I don’t there’s any shortcut, you simply find the means, then the standard deviations by using the deviation from the mean squared, then the covariance using the product of the deviations from the mean, then the correlation using the covariance and standard deviations.

It’s tedious, but you simply apply the definition of correlation, which is seen in the quant section.

I don’t think he’s having trouble with the formula for correlation, but for the information coefficient variables that go into the calculation of correlation. For the IC, I don’t see the curriculum explaining the calculation, but it may just simply be the correlation of your forecasted active returns and the actual active returns. Of course if you have the information ratio, the transfer coefficient, and square root of breadth, you can just solve for the information coefficient.

With that said, the LOS does not specify that we would need to perform this calculation for the purposes of the exam, so I’d just understand what it is that a high or low IC tells you about an active manager’s ability to accurately forecast active returns and how it with the transfer coefficient and square root of breadth give you a manager’s information ratio. I’d draw the line at that and move on to other more important things. My two cents