Question #24
Reading: Reading 40 Analysis of Active Portfolio Management
PDF File: Reading 40 Analysis of Active Portfolio Management.pdf
Page: 10
Status: Correct
Correct Answer: B
Question
An active manager expects his information coefficient to drop from 0.08 to 0.02 in the coming period due to extremely volatile and unpredictable markets. As a response he intends to increase his breadth by a factor of 4. Which of the following statements is most accurately describes the impact on the information ratio?
Answer Choices:
A. The information ratio will remain constant
B. The information ratio will decrease
C. The information ratio will increase
Explanation
Information ratio (IR) = IC ×
If breadth is increased by a factor of 4, this would increase the information ratio by a
factor of 2. As the information coefficient is decreasing by a factor of 4, the information
ratio will decrease.