what is the information coefficient ic 
the information coefficient ic is a measure used to evaluate the skill of an investment analyst or an active portfolio manager the information coefficient shows how closely the analyst s financial forecasts match actual financial results the ic can range from 1 0 to 1 0 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 proportion of predictions made correctly by the analyst begin aligned text ic 2 times text proportion correct 1 textbf where text proportion correct text proportion of predictions made text correctly by the analyst end aligned ic 2 proportion correct 1where proportion correct proportion of predictions madecorrectly by the analyst explaining the information coefficientthe information coefficient describes the correlation between predicted and actual stock returns sometimes used to measure the contribution of a financial analyst an ic of 1 0 indicates a perfect linear relationship between predicted and actual returns while an ic of 0 0 indicates no linear relationship an ic of 1 0 indicates that the analyst always fails at making a correct prediction an information coefficient ic score near 1 0 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 both 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 example of the information coefficientas a hypothetical example if an investment analyst made two predictions and got two right the information coefficient would be ic 2 1 0 1 1 0 begin aligned text ic 2 times 1 0 1 1 0 end aligned ic 2 1 0 1 1 0 if an analyst s predictions were only half of the time right then ic 2 0 5 1 0 0 begin aligned text ic 2 times 0 5 1 0 0 end aligned ic 2 0 5 1 0 0 if however none of the predictions were right then ic 2 0 0 1 1 0 begin aligned text ic 2 times 0 0 1 1 0 end aligned ic 2 0 0 1 1 0 limitations of the information coefficientthe ic is only meaningful for an analyst who makes a large number of predictions this is because if there only a small number of predictions random chance may explain a great deal of the results so if there are only two predictions made and both are right the information coefficient is 1 0 if however the ic is till at or close to 1 0 after several dozen predictions have been made then it is far more attributable to skill than to chance 