Module 50.4 LOS 50.e: Using Fundamental Law to Compare Active Strategies

The CFA presents market timing as an alternative strategy to simple security selection. Market timers be on the direction of the market, or a sector of the market as a whole. For these strategies, the IC is based on the proportion of correct call. The IC equation is shown below:

                IC = 2(% correct) -1

For sector rotation, the active risk of the strategy is the standard deviation of differential returns of the two sectors:

To annualize the risk, we must take into account the number of bets made in the year as the BR value.

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