Correspondence: Ludwig Chincarini, Department of Economics, Pomona College, 425 N. College Avenue, #208, Claremont, California 91711, USA. Tel: +1 909 621 8881; Fax: +1 202 687 4031; E-mail: chincarinil@hotmail.com

¹is an assistant professor of economics at Pomona College, as well as an adjunct professor of finance at Georgetown University, a financial consultant to money managers and hedge funds, and a member of the advisory board of IndexIQ. Prior to this, he was Director of Research at the index mutual fund company, Rydex Global Advisors, where he co-developed the new S&P 500 Equal-Weight index in collaboration with Standard & Poors. He also served a key role in launching the first equal-weight S&P 500 ETF. Before that he served as Director of Research for FOLIOfn. FOLIOfn was a revolutionary new brokerage firm that was one of the first brokerages to offer basket trading. Prior to building FOLIOfn, he worked at the Bank for International Settlements and at Schroders Asset Management. He graduated from the University of California at Berkeley with highest distinction, earning a BA in economics and holds a PhD in economics from MIT with a specialisation in macroeconomics and finance.

²is a senior portfolio manager at First Private Investment Management KAG. Prior to this, he was an assistant professor at the American University in Bulgaria. Before this, he worked for FOLIOfn as a financial economist, helping to create innovative financial products. He also worked for a business newspaper covering financial and other news, and had regular columns on financial economics in a business weekly. He earned his BA in economics from Seoul National University and his PhD in economics from Harvard University with a specialisation in econometrics and finance.

Received 11 October 2007; Revised 11 October 2007.

Abstract

Chincarini and Kim (2006) argued that the information ratio can be interpreted as the square root of R². In this paper, we further develop this argument by, first, making a distinction between the conditional and the unconditional information ratio and, then by clarifying the relationship between R² and two versions of the information ratio. This paper also discusses the implications of our approach for interpreting the Fundamental Law of Active Management.