Hands-On Machine Learning for Algorithmic Trading

The fundamental law of active management

A high Information Ratio (IR) implies attractive out-performance relative to the additional risk taken. The Fundamental Law of Active Management breaks the IR down into the information coefficient (IC) as a measure of forecasting skill, and the ability to apply this skill through independent bets. It summarizes the importance to play both often (high breadth) and to play well (high IC):

The IC measures the correlation between an alpha factor and the forward returns resulting from its signals and captures the accuracy of a manager's forecasting skills. The breadth of the strategy is measured by the independent ...