Hi all, Is the IR ratio a comparitive or direct measure, or neither…? Thanks
Alpha / StDev of Apha I guess it depends how you use it… I guess you could call it comparative if you are using IR ratio to choose between two managers.
Comparative. As McLeod said, it is used to compare against others managers information ratios. It doesn’t tell you much standing alone. From what I remember only Jensen’s alpha is a direct measure.
of course it can be used alone. it tells you how much alpha you get by taking an exta unit of active risk.
It measures how good the manager is at taking available risks and turning it into excess return. So it’s good for comparing managers, but also meaningful on its own. The idea is that some risk and return comes just from the behavior of the benchmark. The information ratio effectively removes the effects of the benchmark and distills out the decisions that are just made by the manager.
CFAMonster Wrote: ------------------------------------------------------- > of course it can be used alone. it tells you how > much alpha you get by taking an exta unit of > active risk. Yes, that is what the IR measures, but it doesn’t mean anything alone. If you have never seen another IR ratio and the fund you are looking at is 0.5 how would you interpret that? So you know you get 0.5 alpha per unit of active risk. Is that good? How would you know? You have to compare it to other funds to see if it is good or bad. Since alpha alone is already a relative measure the market (using beta) it can be used alone. That is how I look at it.
Schweser p 209 says Sharpe, Treynor and IR must be compared to something for their numbers to have meaning.
My posts crossed with bchadwick
thanks
I’d also say it’s both. Absolutely seen, it gives you a risk-adjusted return for an active manager. It quickly answers the question of how “efficient” that manager is in generating alpha and the degree of risk he takes relative to his BM to achieve that alpha. But wouldn’t you consider an IR of 2/4=0.5 differently from an IR of 7/14=0.5? I believe so…
Yes I would too. You are comparing two of them right there though. ; ) I am just giving the answer schweser has. I haven’t looked in the CFAI text.
Yeah, that’s what I meant by “I’d also say it’s both”. You’d use it in an absolute sense, but also in a relative comparison context…I would probably tend to favor using it in a comparison more often b/c we live in a “relative world”…btw, I’m not referring to the CFAI volumes here, just to avoid any misunderstandings ; )
i won’t. i can leverage that 2/4 to 7/14. they are the same. hk Wrote: ------------------------------------------------------- > I’d also say it’s both. Absolutely seen, it gives > you a risk-adjusted return for an active manager. > It quickly answers the question of how “efficient” > that manager is in generating alpha and the degree > of risk he takes relative to his BM to achieve > that alpha. > > But wouldn’t you consider an IR of 2/4=0.5 > differently from an IR of 7/14=0.5? I believe > so…
Interesting thought…can you explain how you leverage that without increasing your original risk exposures?
All it means is that you might allocate 5% of your portfolio to the 2/4=0.5 strategy, or you can allocate 2.5% of your portfolio to a 4/8=0.5 and 2.5% to cash. These get you the same results in your portfolio. (I changed 7/14 to 4/8, to keep the numbers simple, but you get it). The one thing that you might wonder about with a 2/4 strategy vs something like a 7/14 strategy is whether the 7/14 strategy might have some special risks that don’t show up in the historical data. Other things equal, it is reasonable to suspect that 7/14 might be taking on fat-tailed risks that boos performance. Even if 7/14 is the identical 2/4 strategy levered up with borrowed money, there is now an additional risk that borrowing costs may change adversely. (I’m not sure if this point is CFA kosher, but it is something you should think about in investment practice).
you just throwed in a bunch of extra assumptions. 2/4 is the same as 7/14, simple and easy.