How many Information Ratio formulas are there and which ones do I really need to know? Thanks!
There is exact one formula Active return / Active risk and is simillar to Sharpe ratio. The key difference is in fact IR is used for calcualting return by given level of risk related to benchmark while Sharpe measures Return over risk free rate.
This formula can be interpreted in various ways, which all actually give the same sense.
Thank you sir!
IR= IC * BR^[1/2]
Ya, that’s the key point – active return per unit of active risk is determined by IC and breadth.
“The fundamental law states that IR, the ratio of active portfolio return to active portfolio risk, equals the IC times the square root of the BR.” – Buckle, 2004
For unconstrained portfolios.
If it is constrained, then IR = IC x TC x root(BR), where TC (transfer coefficient) is less than 1.
Yepp… I mean on essence…You’ve forgotten add transfer coefficient (TC) in the beginning of equation for constraint portfolio.
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