[Finance] Grinold’s Fundamental Law

The fundamental law of active portfolio management
Grinold was seeking a method of relating performance, skill, and breadth in investing
  • Performance = f(Skill, Breadth)

performance = skill * sqrt(breadth)
IR = IC * sqrt(BR)

The Fundamental Law

  • Performance can be summarized into something called Information Ratio IR which is very much like the Sharpe Ratio(which is compared to the risk free return) but it refers to the sharpe ratio of excess returns - in other words the the manner in which the portfolio manager is exceeding the market’s performance.
    IR, IC, BR
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