Hi Brian,

While I agree with you that we can back out IC from IR...

I still have some problems with this approach:

1) We use this formula as a guide to improve Sharpe Ratio or Information
Ratio.

i.e. knowing SR or IR=IC *sqrt(BR) we can improve IC and BR separately.

Therefore, we need a mechanism that we can measure IC and BR directly.

2) Lets be a bit more concrete on the measurement of BR:

Lets take one simple example:

Lets say our manager is a MACO (Moving Average Cross Over) strategy with
two parameters:

Slow MA = 250 days, Fast MA = 60 days...

How do you count "independent" forecasts in this case?

Number of trades?



On Wed, Mar 14, 2012 at 9:18 AM, Brian G. Peterson <brian@braverock.com>
wrote:

On Wed, 2012-03-14 at 09:01 -0500, Michael wrote:
> is an approximation...

*Everything* that is not directly measured in an approximation.


>  So it's better measure IC and BR directly from raw trades data.


Grinold isn't about measuring *trades*, it is about measuring skill in
*returns*.


> You said BR is trivial, could you please show me how to measure
> "independent bets" in practice?
>

Breadth isn't about 'independent bets'. To quote[1], 'the value added by
the manager will be proportional to the information ratio squared'.
Breadth is 'the number of independent forecasts of exceptional returns
we make in a year'.  If you know the strategy or the manager or the
portfolio, all you do is *count* independent forecasts.

While the rest of chapter 6 in Grinold discusses other methods of
estimating Information Coefficient, these suggest using a degree of
forecasting power and process measurement that you have completely
failed to demonstrate.  Stick with the first approximation.

If that wasn't enough, I draw your attention to the end of the chapter
for another reason why the 'approximation' is probably superior to a
more nuanced mode in your case: "realized information ratios for optimal
portfolios based on {perfect} forecasts are statistically
indistinguishable from the forecasts of the fundamental law"[1 p.161].


Ref:
Grinold and Kahn, Active Portfolio Management. Second Edition.

Chapter 6, pp. 147 ff.

--
Brian

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