An R² of 0.0016 that is worth a fortune
Asked at Two Sigma, Point72
Your daily return forecast has a correlation of just with realized returns (its "information coefficient"). You apply it across roughly independent bets per year.
What is the , and why can such a tiny number still be a world-class signal? Estimate the information ratio.
Show a hint
is the square of that correlation, a minuscule number. But edge compounds across many independent bets. Recall the fundamental law of active management.
Your answer
This one is open-ended. Work it through, then check your reasoning against the full solution.