Transfer coefficient
The correlation between the active weights a manager would like to hold and those actually held, between zero and one. Constraints such as long-only lower it, and cut the information ratio in proportion.
Where you will meet it
Transfer coefficient appears in 3 learning outcomes on the CFA syllabus. A few of them:
- Set out and explain the fundamental law of active management for portfolios and each of its terms: breadth, the information coefficient, the transfer coefficient, and active risk (aggressiveness)
“The transfer coefficient, between zero and one, measures how far constraints such as long-only rules let forecasts pass into active weights.”
- Contrast active strategies such as security selection and market timing, and use active management's fundamental law to assess shifts in strategy
“To evaluate a strategy change, ask what it does to each term: relaxing a long-only constraint raises the transfer coefficient and the IR in proportion; adding securities or rebalancing more often raises breadth, but only if the new bets are genuinely independent.”
- Set out where active management's fundamental law is useful in practice and where it falls short
“The law also ignores transaction costs and treats the transfer coefficient as fixed.”
See also
Correlation · Information ratio
Practise it
Practise transfer coefficient until it is automatic: questions that explain every wrong option.
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