# How to obtain annualized IR from t-monthly IC?

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!

• Please provide some more context. What is your definition of IC? Which model are you trying to build?
– AdB
Commented Apr 10, 2019 at 7:11

## 2 Answers

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.

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?