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Report from the Equity Research Seminar, Part V: Value Added Continued
Mar 1, 1989
In Part IV we discussed value added. The two key constructs in that discussion were the use of the expected utility of active return as a measure of value added and the use of a manager's information ratio as an indication of the manager's opportunity to add value. In this article, we investigate the determinants of the information ratio to find the sources of the manager's opportunity and thus the manager's ability to add value. We also propose a formula that can serve as a useful guide when making strategic investment policy decisions.