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Is the Information Coefficient really a random normally distributed variable?

Updated: Apr 2, 2021

Overview of Information Coefficients

Cornerstone of the active portfolio management is the skill of the manager to select stocks with positive risk-adjusted alphas. Measuring this skill is a difficult task. On one hand, we have the forecasts of the manager and on the other - the actual alphas. Best way to measure the skill of the manager is to check how the forecasts are correlated with the realized alphas. In most cases linear method is applied to measure the correlation between the two, although it is certainly possible that the relationship between the two is non-linear. The estimated correlation of the manager’s skill with the actual alphas is called Information Coefficient (IC) as first described by (Grinold & Kahn, 2000).