Investments, tenth edition

  Results from the Distribution of Actual Information Ratios 

 Kane, Marcus, and Trippi investigated the distribution of the squared IR for all S&P 500 

stocks over two 5-year periods and estimated that this (annualized) expectation,  E (IR 

2

 ), is in 

the range of .845 to 1.122. With a coefficient of risk aversion of 3, a portfolio manager who 

covers 100 stocks with security analysts whose  R -square of forecasts with realized alpha is 

only .001 would still be able to charge an annual fee that is 4.88% higher than that of an index 

fund. This fee is based on the lower end of the range of the expected squared information ratio. 

 One limitation of this study is that it assumes that the portfolio manager knows the 

quality of the forecasts, however low they may be. As we have seen, portfolio weights are 

sensitive to forecast quality, and when that quality is estimated with error, performance 

will be further reduced.