Does anyone remember the long way to do the information ratio: there’s two long formula’s - one for the top and one for the bottom. the bottome one is something like: total active risk = SQRT [(true active risk)^2 + (misfit risk)^2] can someone confirm that formula and the numerator formula that i can’t recall. happy trails!
port return - bm return
thanks Rand0M - But there’s an eloganted version that i alluded to in my original question that i can’t recall the numerator for that would make for a great mutliple choice quesiton. The one you just named is the A = P - B formula; there’s another longer one that i think i’m talking about but i can’t elaborate cuz i don’t remember the exact formula but its more involved that simply A = p - b. its alon ghte lines of the formula i posted above (total active risk = SQRT [(true active risk)^2 + (misfit risk)^2] ) but for active return.
hmmm… how about ture active return = total active return - normal port return misfit return = normal port return - bm return.
I’d say that’s not it but only cuz i’m 95% sure of my formula so that would make: misfit return = SQRT [(total active risk)^2 - (true active risk)^2)] I’m trying to find it in the CFAI texts right now but got side tracked by march madness.
As far as I can remember, there are total 3 equation for information ratio. 1. Alpha/Standar deviation of alpha. 2. The one you described. 3. IC=IB* Squr(IC) Information ration = IB (investment knowledge) * squrt (# of independent investment decisions)
exactly WS… but what’s the numerator of the one i described - i can’t remember that formula…i can only remember the denominator
strikershank Wrote: ------------------------------------------------------- > exactly WS… > > but what’s the numerator of the one i described - > i can’t remember that formula…i can only > remember the denominator Oh, I see. The numerator was the true active return, which is defined as Total Active return-Misfit Return. Total active return=Port return-investor index return. Misfit Return=Port return-port benchmark return. I saw your early post “misfit return = SQRT [(total active risk)^2 - (true active risk)^2)]” That wouldn’t make any sense…return solved by risk? Or that was just your typo? I am not sure if I answered your questions. Good a good one.
how about looking it up in the book instead of asking in the forum
hey turkish - you always this helpful? looking it upin the book. ya, never thought of that. Wow - great advice. you’ll notice above i mentioned i tried to find it in the CFAI texts and haven’t been able to given the 4000 pages. you’ll probably suggest i use the index in the back of the books next. any other mind altering suggestions turkish? (i didn’t sleep well last night).
CFAI texts are 2500 pages.
IR = IC * Sqrt(IB) or IR = ALPHA/Ann. Std dev. = Ann. excess ret/TE Tracking error risk = sqrt[(total risk)^2 - (misfit risk)^2) Is that correct?