# Explain To Me the Fundamental Law of Active Management

I can spit out the equation, but I am having a difficult time understanding and tethering this to other material.

It means that Information Ratio depends on how many decisions a manager is taking and how many assets the manager is following. Thats the layman answer I am going to give.

The information coefficient (IC) basically tells you how good the manager is at predicting alpha (so a high correlation between predicted and actual alpha would indicate a high IC). Breadth refers to the number of stocks covered. If you increase the universe of stocks covered, you will be increasing breadth but not necessarily IC.

kingstongal Wrote: ------------------------------------------------------- > Breadth > refers to the number of stocks covered. If you > increase the universe of stocks covered, you will > be increasing breadth but not necessarily IC. No. Breadth refers to the independent investment decisions taken, not stocks covered, so if you - buy all retails stocks since you think the sector as a whole will do well, it counts as one breath. - cover all retail stocks, but is constrained by not allowed to short stocks --> your breath is limited since you know certain stocks will go down in your coverage, but you can’t short it --> not count as breadth.

Breadth relates to the number of investment decisions made, and IC relates to the value added by each decision. You have to take the root of the breadth though so they’re consistent. I think that’s it at least. Any corrections would be appreciated if not.

IC - Capable of good Ideas for alpha IB - Balls to actually execute the Ideas Proxy for the actual IRatio.

IC is quality; IB is quantity.

kingstongal Wrote: ------------------------------------------------------- > The information coefficient (IC) basically tells > you how good the manager is at predicting alpha > (so a high correlation between predicted and > actual alpha would indicate a high IC). Breadth > refers to the number of stocks covered. If you > increase the universe of stocks covered, you will > be increasing breadth but not necessarily IC. Ooooops! My bad, I think I am starting to get totally confused…having an evening off studying today - much needed I’d say!

IC is a pretty simple calculation… its used pretty heavily in quant. Its the correlation between the forecasts on your stocks vs. its subsequent return. It’s basically saying “how well did I do in forecasting the return?”