medium · Frm Part 2 Risk & Investment Management
According to the 'Fundamental Law of Active Management,' if a manager doubles the 'Breadth' (BR) of independent bets but her 'Information Coefficient' (IC) is halved, what happens to the Information Ratio (IR)?
- The IR doubles because breadth is now the dominant factor in the equation.
- The IR remains unchanged as the two effects cancel each other out.
- The IR decreases by approximately 29%.
- The IR increases by 41% due to the square root benefit of the additional bets.
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