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Hi David,

Page 5 of Chapter 14: Portfolio Construction (Grinold) states the following

Consider for instance, an Information Coefficient (IC) of 0.05 and a typical residual risk (volatility) of 30 percent would lead to an alpha scale of 1.5 percent (0.05 x 0.3 = 1.5%).

In this case, the mean alpha would be 0, with roughly

Could you kindly explain how you arrived to the statement highlighted in bold, namely the 2/3 and 5%?

Thanks,

Karine

Page 5 of Chapter 14: Portfolio Construction (Grinold) states the following

Consider for instance, an Information Coefficient (IC) of 0.05 and a typical residual risk (volatility) of 30 percent would lead to an alpha scale of 1.5 percent (0.05 x 0.3 = 1.5%).

In this case, the mean alpha would be 0, with roughly

**two-thirds of the stocks having alphas between -1.5 percent and +1.5 percent and roughly 5 percent of the stocks having alphas larger than +3.0 percent or less than -3.0 percent**. In Table 1 below, the original alphas have a standard deviation of 2.00 percent and the modified alphas have a standard deviation of 0.57 percent. This implies that the constraints in this example effectively shrank the IC by 62 percent, a significant reduction.Could you kindly explain how you arrived to the statement highlighted in bold, namely the 2/3 and 5%?

Thanks,

Karine

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