How many bets for an information ratio of 0.75?

Question

You want an annualized information ratio of 0.75, and your forecasting signal has an information coefficient (IC) of 0.05 per bet. How many independent bets per year do you need?

Accepted Answer

The Fundamental Law, rearranged. The information ratio is skill times the square root of breadth, so solving for breadth: IR = IC 	imes \sqrt{BR} \quad\Longrightarrow\quad BR = \left(\frac{IR}{IC}ight)^2. Plug in the numbers. With target IR = 0.75 and IC = 0.05: BR = \left(\frac{0.75}{0.05}ight)^2 = 15^2 = 225 	ext{ bets per year}. Interpretation. You need about 225 independent bets a year. A crucial caveat lurks in the word "independent": if your 225 bets are actually correlated (say, 225 tech stocks that move together), the effective breadth is far smaller and the real IR falls well s…

How many bets for an information ratio of 0.75?

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