Information Coefficient and Information Ratio

CFA Level II Portfolio Management
#1

Hey everyone,

if the IC is defined as a correlation between predictions and actual returns, then it is defined between -1 and +1 correct? I somehow find contradiction definitions, that it is 0-1 or -1 to +1. Because this does matter when we plug it into the IR computation, i.e. if we are interested in high IRs then a negative IC would make the IR negative. But then again, I am wondering, is a negative necessarily a bad thing, since it would still allow us to draw conclusions from the predictions.

Thanks

Tartaglia

#2

yes, IR can be negative.

IR is active return over active risk

active return can be negative as it’s excess return over the benchmark