The information coefficient (IC) is a measure of the merit of a predicted value. In
finance, the information coefficient is used as a performance metric for the predictive skill of a
financial analyst
A financial analyst is a professional, undertaking financial analysis for external or internal clients as a core feature of the job.
The role may specifically be titled securities analyst, research analyst, equity analyst, investment analyst, o ...
.
The information coefficient is close to
correlation
In statistics, correlation or dependence is any statistical relationship, whether causal or not, between two random variables or bivariate data. Although in the broadest sense, "correlation" may indicate any type of association, in statisti ...
in that it can be seen to measure the linear relationship between two
random variable
A random variable (also called random quantity, aleatory variable, or stochastic variable) is a mathematical formalization of a quantity or object which depends on random events. It is a mapping or a function from possible outcomes (e.g., the p ...
s, e.g. predicted stock
returns
Return may refer to:
In business, economics, and finance
* Return on investment (ROI), the financial gain after an expense.
* Rate of return, the financial term for the profit or loss derived from an investment
* Tax return, a blank document o ...
and the actualized returns. The information coefficient ranges from -1 to 1, with 0 denoting no linear relationship between predictions and actual values (poor forecasting skills) and 1 denoting a perfect linear relationship (good forecasting skills). Similarly, -1 reflects a negative linear relationship, i.e. the analyst always fails to make an accurate prediction.
See also
*
Information ratio The information ratio measures and compares the active return of an investment (e.g., a security or portfolio) compared to a benchmark index relative to the volatility of the active return (also known as active risk or benchmark tracking risk). It ...
References
Financial economics
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