medium · FRM Part 2 Risk & Investment Management
An institutional allocator is comparing two active managers using the Fundamental Law of Active Management. Manager A has an Information Coefficient (IC) of 0.05 and makes 100 independent bets per year. Manager B has an IC of 0.12 but makes only 16 independent bets per year.
Assuming both have a Transfer Coefficient (TC) of 1.0, which manager provides a higher Information Ratio (IR)?
- Manager A, because the higher breadth more than compensates for the lower skill per bet.
- Manager A is preferred only if the investor's whole wealth is in this manager, as Manager B has a better Treynor ratio.
- Both managers are equivalent because the product of IC and breadth is similar.
- Manager B, because skill (IC) is the dominant factor in the IR calculation.
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