User 148992

Clarifying the Information Ratio and Sharpe Ratio

Thank you for your response, and the article does good job of clarifying the IR and Sharpe ratio. My issue comes in the latter part when you describe the practical use. This piece of the article was written to show people how to utilize the IR. I don't mean to be the statistics police (and I do realize I am going a little overboard here), I just think that when you are teaching predictive statistics you have to make a point to ensure things like "consider a manager with an alpha of say, 3%, and standard deviation of say 10%" really means that "you believe the manager will continue to produce an information ratio of .3 with a standard deviation of 10%". What you don't explain here is that the probability of a manager actually achieving an IR of .3 or greater over the following year (given the assumption that total IR of the market is normally distributed with mean 0 and std dev 1) is only 38%. This might make people a little more wary of using .3 or .4 or whatever arbitrary number they decide to use for their predicted IR.

The point I am trying to make is that this article is written as an introduction/clarifica... of the ratios aimed at an audience that my not understand some of these concenpts fully. While I understand that you might be speechless if you think I might be reading this article for investment advice, I bet at least one someone used it that way. When writing an explanatory piece like this for the masses, it needs to be wary of the traps people can fall into when using historical analysis. All I'm saying is please try not to assume too much, and make sure it is understood that people need to use their brains and are personally responsible for the inputs that they use and cannot attribute losses (or hopefully gains) to historical data.