Fundamental Law of Active Management
Originally stated by Grinold and Kahn (2001), the Fundamental Law of Active Management states that the information ratio (IR) is equal to the information coefficient (IC) multiplied by the square root of breadth (defined as the number of active decisions taken per year.) The information coefficient represents the investor’s knowledge about a given investment.
The law indicates that low-turnover strategies must be more accurate about a given investment in order to produce the same information ratio as a high-turnover strategy.
For more information, see all articles on: Active Management, Investing in Stocks, Investment Returns, Portfolio Management, Security Selection See also:
The Intelligent Investor: The Classic Text on Value Investing
Financial Statement Analysis: A Practitioner's Guide, 3rd Edition
Managing Investment Portfolios: A Dynamic Process (CFA Institute Investment Series)
