Acceptable Tracking Error
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Tracking Error Information Ratio
E-mail: * Password: * Remember me Request new password Updates Contact Us Site Map Home tracking error interpretation Reference Materials Articles Concepts Statistics StatFACTS Links Conference Materials Dynamic Text Contact Us Request More Information Complimentary Investment Analysis Schedule Web Demo Tracking Error Also known as the
Annualized Tracking Error
standard deviation of excess returns, tracking error measures how consistently a manager outperforms or underperforms the benchmark. PDF version: StatFacts_Tracking_Error.pdf How Is it Useful? Tracking error measures the consistency of excess returns. It is created by taking the difference between the manager return and the benchmark return every month or quarter and then calculating how volatile that difference tracking error cfa is. Tracking error is also useful in determining just how “active” a manager’s strategy is. The lower the tracking error, the closer the manager follows the benchmark. The higher the tracking error, the more the manager deviates from the benchmark. What Is a Good Number? A good tracking error depends upon investor preference. If the investor believes markets are efficient and that it is difficult for active managers to consistently add value, then that investor would prefer a lower tracking error. Alternatively, if the investor believes that smart active managers can add significant value and should not be “tied down” to a benchmark, the investor would tolerate higher levels of tracking error. What Are the Limitations? Tracking error cuts both ways, measuring both periods of outperformance and underperformance versus the benchmark. An investor would prefer high tracking error if there was a high degree of outperformance but a low tracking error if there was consistent underperformance. Tracking error does not distinguish between the two. What Do the Graphs Show Me? Below
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Retirement Personal Finance Trading Q3 Special Report Small Business Back to School Reference Dictionary Term Of The Day North American Free Trade Agreement - NAFTA A regulation implemented on Jan. 1, 1994, that decreased and eventually http://www.investopedia.com/terms/t/trackingerror.asp eliminated ... Read More » Latest Videos Jared Dillian: Influence Why is Cybersecurity so Important for Investors & Advisors? Guides Stock Basics Economics Basics Options Basics Exam Prep Series 7 Exam CFA Level 1 Series 65 Exam Simulator Stock Simulator Trade with a starting balance of $100,000 and zero risk! FX Trader Trade the Forex market risk free using our free Forex trading simulator. Advisor tracking error Insights Newsletters Site Log In Advisor Insights Log In Tracking Error Loading the player... What is a 'Tracking Error' Tracking error is the divergence between the price behavior of a position or a portfolio and the price behavior of a benchmark. This is often in the context of a hedge or mutual fund that did not work as effectively as intended, creating an unexpected profit or loss instead.Tracking error is acceptable tracking error reported as a standard deviation percentage difference, which reports the difference between the return an investor receives and that of the benchmark he was attempting to imitate. BREAKING DOWN 'Tracking Error' Since portfolio risk is often measured against a benchmark, tracking error is a commonly used metric to gauge how well an investment is performing. Tracking error shows an investment's consistency versus a benchmark over a given period of time. Even portfolios that are perfectly indexed against a benchmark behave differently than the benchmark, even though this difference on a day-to-day, quarter-to-quarter or year-to-year basis may be ever so slight. Tracking error is used to quantify this difference.Calculation of Tracking ErrorTracking error is the standard deviation of the difference between the returns of an investment and its benchmark. Given a sequence of returns for an investment or portfolio and its benchmark, tracking error is calculated as follows:Tracking Error = Standard Deviation of (P - B).For example, assume that there is a large cap mutual fund that is benchmarked to the Standard and Poor's (S&P) 500 index. Next, assume that the mutual fund and the index realized the follow returns over a given five-year period:Mutual Fund: 11%, 3%, 12%, 14% and 8%.S&P 500 index: 12%, 5%, 13%, 9% and 7%.Given this data, the series of differences is then (11% - 12%), (3% - 5%), (12% - 13%), (14% -