CFA Practice Question

There are 136 practice questions for this study session.

CFA Practice Question

A market timer has independent information about market returns each quarter. To have an IR of 0.8, he needs an IC of ______.
A. 0.2
B. 0.4
C. 0.8
Explanation: 0.8 = IC x 41/2, IC = 0.4

A high level of skill translates into a high information ratio. Note that while market timing strategies can generate very large returns in a particular year, they're heavily dependent on luck. On a risk-adjusted basis, the value added will be small. This will not surprise most institutional managers, who avoid market timing for just this reason.

User Contributed Comments 4

User Comment
jcheng0001 Why is it 42/2 ?
gkbarr88 Also, evaluating that explanation leads to an inequality.
Ahmed1974 The equation in the explanation is ambiguos
maxsouto Jcheng0001 It is 4^1/2 because there are 4 quarters a year, so the number of independent "bets" in the active managed portfolio (Breadth) should be 4.
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