This implies that the ability of the manager to add value increases as:
Given our risk aversion level, we all want the investment manager with the highest IR.
A. IR: how high the information ratio to take.
B. λ: how aggressive of the investment strategy.
C. ω: how much residual risk to take.
They all seek the manager with the highest IR. A and B will determine the optimal level of residual risk to take.
0.752/(4 x 0.15) = 0.9375%.
A. IR: information ratio.
The value added is determined by IR and λ. The IR has a bigger impact on the value added.
0.752/(4 x 0.05) = 2.8125%.