This is the most crucial assumption. Managers need to know what they know, and what they don't know. They need to know how to turn their ideas into portfolios and gain the benefits of their insights.
If the information sources are dependent, it then results in an decrease in the overall skill level of a manager.
where γ is the correlation between the two information sources.
It is maximized when there is no correlation.
A. He uses 12 information sources.
B. He makes the same bet 12 times.
C. He makes 12 industry bets per year.
No calculation is needed as they are perfectly correlated.
IC(com) = 0.06 (2/1.5)1/2 = 0.069.
The combined IC is maximized as there is no correlation: 0.05*21/2.