Grinold Fundamental Law ? On what is this based?

[Rblc]

I have been thinking about Grinold's Fundamental law for the IC recently given the exam were near . I kinda took it for granted since for the purpose of the FRM this law is kinda of easy to apply. But I was wondering, on what is this law based?And more importantly is it relevant in any way ,even in the mean variance framework context, or was that just something that was adopted by the industry like the Reinhart-Rogoff law was adopted by policy makers ? (I know i'm playing with fire with this association)

 

[Torsleno]

From what I know, the formula is actually a decomposition of the Information Ratio (IR is itself linked to active returns, which is loosely speaking the returns from the active manager), decomposition which is optimized under several constraints to give the IR = IC *sqrt (breadth). The full analytical solution is in the original paper (Grinold 1989) but I never managed to find it online!
I think it is relevant to today's active portfolio management, albeit refinements were added later on and that it remains debatable.

 

[Rblc]

Hello @Torsleno - there are some papers out there freely available but none seem to explore how he derives his equation and i could not find any empirical research testing it's viability. This is why i was referencing Reinhart-Rogof.

 

[Torsleno]

I am not aware of any empirical research. Happy to follow that one!