High skill, modest breadth: what information ratio?

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A strong forecasting signal has an information coefficient (IC) of 0.10, and you make 64 independent bets per year. What annualized information ratio does this imply?

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The Fundamental Law. The information ratio is skill times the square root of breadth: IR = IC 	imes \sqrt{BR}. Plug in the numbers. With IC = 0.10 and BR = 64: IR = 0.10 	imes \sqrt{64} = 0.10 	imes 8 = 0.8. Interpretation. A high skill level (IC of 0.10 is exceptional in practice) over just 64 bets gives an information ratio of 0.8. Compare with a weak signal (IC 0.03) that needed 400 bets to reach 0.6: strong skill buys a high IR with far fewer bets. There is a real trade-off between depth (skill per bet) and breadth (number of bets), and the same IR can be reached by many combinations, …

High skill, modest breadth: what information ratio?

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