DEFINITION of 'Information Coefficient - IC'

The information coefficient (IC) is a measure used to evaluate the skill an investment analyst. The IC shows how closely the analyst's financial forecasts match actual financial results. The IC can range from 1 to -1, with -1 indicating the analyst's forecasts bear no relation to the actual results, and 1 indicating that the analyst's forecasts perfectly matched actual results.

The formula for the IC is:

IC = (2 * proportion correct) - 1, where "proportion correct" is the proportion of predictions made correctly by the analyst.

So, for example, if an analyst made two predictions and got two right, the IC would be (2 * 1.0) - 1 = 1.

If an analyst's predictions were half right, then (2 * 0.5) -1 = 0

If none of the predictions were right, then (2 * 0) -1 = -1

BREAKING DOWN 'Information Coefficient - IC'

An information coefficient (IC) score near +1 indicates that the analyst has great skill in forecasting. But, in reality, if the definition of "correct" is that the analyst's prediction matched the direction (up or down) of actual results, then the odds of getting the forecast right are 50/50. So even an analyst with no skill whatsoever could be expected to have an IC of around 0, meaning that half of the forecasts were right and half were wrong. A score close to 0 reveals that the analyst's forecasting skills are no better than results that could be achieved by chance, suggesting that ICs approaching -1 are rare.

The IC is not to be confused with the Information Ratio (IR). The IR is a measure of an investment manager's skill, comparing a manager's excess returns to the amount of risk taken.

The IC and the IR are components of the Fundamental Law of Active Management, which states that a manager's performance (IR) depends on skill level (IC) and its breadth, or how often it is used.

RELATED TERMS
  1. Technical Job Skills

    Technical job skills refer to the talent and expertise a person ...
  2. Soft Skills

    Soft skills are the character traits and interpersonal skills ...
  3. Pearson Coefficient

    Pearson coefficient is a type of correlation coefficient that ...
  4. Analyst Expectation

    An analyst expectation is a report indicating how a particular ...
  5. Investment Analyst

    An investment analyst is a financial professional with expertise ...
  6. Standalone Risk

    Standalone risk is associated with a single unit of a company, ...
Related Articles
  1. Investing

    Chip Stocks Start Year Strong on Upbeat Nov. Data

    A SIA report indicates the group is doing better than the average for this time of year.
  2. Investing

    Samsung Could Displace Intel As The Largest Chip Supplier

    Samsung could be on the path to doing something no other supplier has been able to do: displace Intel as the number one chip supplier.
  3. Personal Finance

    MBA Skills: What Employers Are Really Looking For

    To make sure that you have what recruiters want, take a look at Bloomberg's annual job skills survey.
  4. Personal Finance

    Career advice: Financial analyst versus data analyst

    Learn the distinctions between financial analysts and data analysts, and determine which career is right for you based on your skill set and interests.
  5. Financial Advisor

    Career advice: Financial analyst versus research analyst

    Read an in-depth comparison between a career as a financial analyst and a career as a research analyst, including advice on which one to choose.
  6. Personal Finance

    The Top 5 Skills an Investment Banker Needs

    What are the top skills investment bankers need to have? Are i-bankers born or made?
  7. Personal Finance

    Mergers and Acquisitions Analysts: What They Do, How Much They Make

    Mergers and acquisitions analysts perform the analysis and modeling to support buying, selling, restructuring, and combining companies.
  8. Personal Finance

    The Best Careers For Your Skills

    Thinking of a career change, but you're not sure where to start? Here is a breakdown of the best industries for your skills.
RELATED FAQS
  1. How does correlation affect the stock market?

    Learn about the role correlation plays in prudent stock market investing, and how the correlation coefficient is used to ... Read Answer >>
  2. How do interpersonal skills influence a business culture?

    Interpersonal skills are vital to business culture because they determine not only how a person interacts with others, but ... Read Answer >>
  3. What is the correlation between U.S. stock prices and the value of the U.S. dollar?

    The correlation between American stock prices and the U.S. dollar comes down to the two variables having a correlation coefficient ... Read Answer >>
Trading Center