Page 296 - DLIS402_INFORMATION_ANALYSIS_AND_REPACKAGING

Unit 14: Information Planning and Management

The science of information analysis began in the 1970s with work by Treynor and Black [1973], Notes
Brealey and Hodges [1973], Ambachtsheer [1974], Rosenberg [1976], and Ambachtsheer and Farrell
[1979]. These authors all investigate the role of active management in investing: its ability to add
value and measures for determining this. Treynor and Black, and Hodges and Brealey, were the
first to examine the role of security analysis and active management within the context of the capital
asset pricing model. They investigate the requirements for active management to outperform the
market, and identify the importance of correlations between return forecasts and outcomes among
these requirements.
Ambachtsheer, alone and with Farrell, provides further insights into the active management process,
specifically, turning information into investments. He coined the term “information coefficient,” or
IC, to describe this correlation between forecasts of residual returns (alphas) and subsequent
realizations.

Rosenberg investigates the active management process and measures of its performance,
as part of his analysis of the optimal amount of active management for institutional
investors.

These authors, focuses explicitly on the task of information analysis itself. It presents a unified
treatment of information analysis, with both theoretical discussions and concrete examples. Given
that information analysis is a comprehensive subject, we cover the general approach, recommending
as well a specific approach to best analyze investment information.
First we describe how and where information appears in the active management process, and then
describe the two-step process of information analysis. Turning information into portfolios. The second
step is analyzing the performance of those portfolios. Here we focus on one particularly convenient
statistic—the information ratio—which can summarize how the information can generate investment
value-added. We also explain the information coefficient, a close relative of the information ratio.
Finally, we step back from the details of information analysis to discuss some precautions.

Information analysis is a tool, and, as with a hammer, one must distinguish
between thumb and nail.

Self Assessment

Fill in the blanks:
1. Information planning and management can be used in ...... .
2. ...... is the vital input into any management strategy.
3. ...... for information and information technology assures that information systems will meet
future operational requirements.
4. Information analysis is the science of ...... .
5. The science of information analysis began in ...... .

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