IR ≈ IC*(IB)^(1/2), IB = investment breadth, which is defined as the number of independent, active investment decisions made each year.
Question:
scenario 1: Fund manager only invest in one stock for a whole year
scenario 2: Fund manager only invest in one stock for first half of a year and switch to another for the second half of a year (Still one stock)
Will scenario 1 and 2 have the same IB? Thanks!
Good question - In my view, it should be treated as 2 seperate independent active bets. He actively moved his position from 1 stock to another during the year.
We can think of breadth as having two dimensions — one cross-sectional dimension (number of potential assets) and one time series dimension (how many bets per asset per year e.g. 2 in this case).
Thanks, Zuzu. Based on your veiw, the breadth will be as below bold?
scenario 1: Fund manager only invest in one stock for a whole year -> Breadth:1
scenario 2: Fund manager only invest in one stock for first half of a year and switch to another for the second half of a year (Still one stock) -> Breadth:2
How about if Scenario 1 fund manager made the independent decesion not to change the stock after 1H?
Right
" How about if Scenario 1 fund manager made the independent decesion not to change the stock after 1H?"
It will not be **considered “active” (**number of independent, “active” investment decisions made each year).
I think this is the grey area, where this ratio gets critized that it improves as the no. of bets are increased.
Right
" How about if Scenario 1 fund manager made the independent decesion not to change the stock after 1H?"
It will not be **considered “active” (**number of independent, “active” investment decisions made each year).
I think this is the grey area, where this ratio gets critized that it improves as the no. of bets are increased.
Thanks Zuzu! Yes, agree this is gray area…