Alpha Beta Tracking Error
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Tracking Error Information Ratio
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Annualized Tracking Error Formula
our free Forex trading simulator. Advisor Insights Newsletters Site Log In Advisor Insights Log In Does Your Investment Manager Measure Up? By Gary Barohn | September 13, 2014 -- 11:00 AM EDT Picture yourself at a fancy party. There is a group of high-powered professionals is in the corner guffawing and comparing the performance of their investment managers. Strange, unfamiliar terms drift through the air:
Tracking Error Vs Alpha
Sharpe ratio, alpha, r-squared, down-market capture ratio ... You hear the term "batting average" and think you can join in, but it's quickly apparent they aren't talking baseball. There are many statistical factors that professional analysts use to assess an investment manager. They may seem confusing at first, but many of these factors can be used by non-professionals to determine the value of their own investment managers. To make calculations easier, several of these statistical measures are available in commercial software packages such as Wilshire, Zephyr, or PSN Informa. In this article, we'll go through the key statistics you need to know to assess your own managers performance. AlphaAlpha is a measure of investment performance adjusted for the risk taken. It indicates the portion of a manager's return that can attributed to the manager's skill rather than the movement of the overall market. A positive alpha implies that a manager has added value over and above the performance of the market; conversely, a negative alpha would indicate that the manager has reduced value by underperforming the market. (To learn more, read Adding Alpha Without Adding Risk.) BetaBeta measures the manager's systematic risk. It compares the return volatility of the manager to the volatility of returns for a comparable market index. The index has a beta of 1
Message As the markets have gotten more volatile, and a number of hedge funds and a range of ‘alternative’ investment strategies have generated substantial losses, it is a very good time to think about tracking error and what it means. In portfolio management, tracking error tracking error volatility refers to the divergence in performance between a portfolio or strategy and its benchmark.
Tracking Error Cfa
If an S&P500 fund diverges from the S&P500, you have tracking error. Mutual fund managers often worry about tracking error because annualised tracking error they do not want to be judged as having under-performed their benchmark. If a fund can reasonably be expected to closely track a benchmark index, tracking error is useful. On the other hand, there are many http://www.investopedia.com/articles/pf/07/investment_manager_stats.asp portfolios that are not designed to track a benchmark index---often that is specifically the goal. Excessive focus on tracking error by investors or fund managers is ultimately likely to lead to less-than-ideal decisions. I have written a number of articles about low-Beta / low-R^2 investing strategies. The basic idea is that it is quite simple to design a portfolio that specifically does not track the market well. Beta measures the degree to http://seekingalpha.com/article/45989-does-tracking-error-matter which your portfolio amplifies or damps swings in the market and R^2 (also called R-squared) shows the degree to which a portfolio’s movements can be explained by moves in the broader market. A low-Beta / low-R^2 portfolio tends to respond weakly to market moves and has much of its volatility caused by factors other than the market as a whole. This is desirable if you do not want your portfolio to be driven by the ups and downs of the market. This does not mean that a portfolio is low-risk, however---it just means that the portfolio is not driven by the market’s moves. This kind of portfolio will not track any particular index. A challenge for investors with such portfolios is to figure out how to think about benchmarking. The reality is that many portfolio designs are going to take a long time to be vindicated in terms of a high level of confidence that the portfolio is superior. This is particularly the case for a portfolio that is designed not to track a market benchmark. To demonstrate this, I have created a fairly simple example. We have designed a portfolio that is projected to out-perform the S&P500 in terms of both absolute return and with lower volatility. The actual holdings of thi
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