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When we checking the relation between some factors and Stock price, we could use Information Coefficient(IC) to meausre.

And then I already have t-monthly IC for each factor, and I need to calculate the annualized Information Ratio(IR).

I think the formula should be

Annual_IR = (AVG(IC) / t) / (STD(IC) * SQRT(12/t))

However, I read a sample code with a difference. What I am confused about is that he multiplies another 12 after the calculation above.

Thank you for any help!

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  • $\begingroup$ Please provide some more context. What is your definition of IC? Which model are you trying to build? $\endgroup$ – AdB Apr 10 at 7:11
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What is 't'? Your definitions notwithstanding, it looks like a simple annualization--STD is annualized, average IC, unless done elsewhere, doesn't appear to be.

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The industry standard definition of IR is your excess return divided by your tracking error Tracking error is nothing but the standard deviation of your excess returns

$Information\ Ratio\ =\ \frac{Ann.\ Excess\ Returns}{Ann.\ Tracking\ Error}\\ \\ Ann.\ Tracking\ Error\ =Annualized\ \sigma ( Excess\ Returns)$

Information coefficient on the other hand is not a very standard metric. Could you elaborate on what metric you are using for IC?

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