The Law That Says You Make More Money Betting More

Introduction

If you bet more, you will have better performance. At least, that’s the takeaway from the now famous formula by Grinold that is old but still referential and guides thinking in systematic processes today.

It goes something like this: IR = IC x sqrt(BR)

You’ve likely seen it, but do you really get it? More importantly, do you understand its implications? Your Information Coefficient must be measured against idiosyncratic returns, not total returns and the sqrt(BR) multiplier only works because residual returns are uncorrelated across assets.