emilioalzamora1
Well-Known Member
Fully understood, @David Harper CFA FRM.
I totally see your point that:
IR = α/TE could be confusing as candidates may think in regression language and want to dissect alpha from the regression equation instead of simply comparing the returns of the actively managed portfolio versus its benchmark.
Yes indeed, notationally
IR = α/TE = R(p) - R(b)/TE
should be used.
In case you need the Lhabitant book as a reference to back things up, I can send it over.
Litterman uses the same quite opaque terminology saying:
"A useful way to assess the risk/ reward trade-off is with the information ratio,
defined as active return per unit of active risk (or active return divided by tracking
error)."
I totally see your point that:
IR = α/TE could be confusing as candidates may think in regression language and want to dissect alpha from the regression equation instead of simply comparing the returns of the actively managed portfolio versus its benchmark.
Yes indeed, notationally
IR = α/TE = R(p) - R(b)/TE
should be used.
In case you need the Lhabitant book as a reference to back things up, I can send it over.
Litterman uses the same quite opaque terminology saying:
"A useful way to assess the risk/ reward trade-off is with the information ratio,
defined as active return per unit of active risk (or active return divided by tracking
error)."