Asset Management Tracking Error
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Tracking Error Information Ratio
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Annualized Tracking Error
Trader Trade the Forex market risk free using our free Forex trading simulator. Advisor 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 tracking error volatility 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 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
the benchmark or index it was meant to mimic or beat. Tracking error is sometimes called active risk. There are two ways to
Tracking Error Cfa
measure tracking error. The first is to subtract the benchmark's cumulative
Annualised Tracking Error
returns from the portfolio's returns, as follows: Returnp - Returni = Tracking Error Where: p = portfolio tracking error etf i = index or benchmark However, the second way is more common, which is to calculate the standard deviation of the difference in the the portfolio and benchmark http://www.investopedia.com/terms/t/trackingerror.asp returns over time. The formula is as follows: How it works (Example): Let's assume you invest in the XYZ Company mutual fund, which exists to replicate the Russell 2000 index, both in composition and in returns. If the XYZ Company mutual fund returns 5.5% in a year but the Russell 2000 (the benchmark) returns 5.0%, http://www.investinganswers.com/financial-dictionary/mutual-funds-etfs/tracking-error-4970 then using the first formula above, we would say that the XYZ Company mutual fund had a 0.5% tracking error. As time goes by, there will be more periods during which we can compare returns. This is where the second formula becomes more useful. The consistency (or inconsistency) of the "spreads" between the portfolio's returns and the benchmark's returns is what allows analysts to try to predict the portfolio's future performance. If, for example, we knew that the portfolio's annual returns were 0.4% higher than the benchmark 67% of the time during the last five years, we would know that this would probably be the case going forward (assuming the portfolio manager made no major changes). The predictive value of these calculations gets even better when there are more data points and when the analyst accounts for how the portfolio's securities move relative to one another (this is called co-variance). Several factors generally determine a portfolio's tracking error: 1. The degree to which the
Funds Money Managers Plan Sponsors Reference MaterialsArticles Concepts Statistics StatFACTS Links Conference Materials Dynamic Text Client ResourcesTraining/SupportRegional Training New User Online Training Weekly Online Training Template Library Guides Help VideosOnline Tutorials Quick Tip Videos DownloadsData Updates Software Beta Installs WebEx E-mail: http://www.styleadvisor.com/resources/statfacts/tracking-error * Password: * Remember me Request new password Updates Contact Us Site Map Home 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 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 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 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 asset management tracking 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 are two very different active managers. The green bars represent months of outperformance. The red bars are months of underperformance versus the benchmark. Tracking error is created by taking the standard deviation of the red and green bars. We can infer just how active a manager’s strategy is from the below information. The small performance deviations seen in the upper graph likely indicate the manager is only making small bets away from t