Given a choice between IR information ratio & IC information Coefficient to choose a better portfolio manager which one is more suitable? Candidate B has higher IR But candidate C has higher IC
From what I remember, it’s always the manager with the highest IR.
That’s correct. I wanted know why. Why not IC?
The IC is a component of the IR.
IR = IC * TC * sqrt(BR)
The IC measures the correlation between the manager’s active return and expected active return.
So two managers could have the same IC, however if manager 1 has a lower TC (constrained portfolio) and/or BR (he takes less positions in a given period), then his IR will be lower than manager 2.