Glossary term
Information Coefficient (IC)
How well a signal predicts future returns — measured as a correlation.
The Information Coefficient (IC) is the cross-sectional correlation between a signal (e.g. a momentum score) and the next period's return. An IC of 0 means the signal has no predictive power; an IC of 1 means it perfectly predicts the ranking of returns. In practice, even an IC of 0.05 (5%) can be commercially valuable at scale because it compounds across hundreds of stocks and many months.
Example: A momentum strategy with IC = 0.03 correctly ranks stocks slightly better than random, which translates into consistent outperformance across a large portfolio.