Benchmark Tracking Error
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How To Calculate Tracking Error Of A Portfolio
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 context of a hedge or mutual fund that did not work as effectively as intended, creating how to calculate tracking risk 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. 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%.
it indicates how closely a portfolio follows the index to which it is benchmarked. The best measure is the standard tracking risk formula deviation of the difference between the portfolio and index returns. Many portfolios tracking error information ratio are managed to a benchmark, typically an index. Some portfolios are expected to replicate, before trading and other tracking error interpretation costs, the returns of an index exactly (e.g., an index fund), while others are expected to 'actively manage' the portfolio by deviating slightly from the index in order to http://www.investopedia.com/terms/t/trackingerror.asp generate active returns. Tracking error is a measure of the deviation from the benchmark; the aforementioned index fund would have a tracking error close to zero, while an actively managed portfolio would normally have a higher tracking error. Thus the tracking error does not include any risk (return) that is merely a function of the market's movement. In addition to https://en.wikipedia.org/wiki/Tracking_error risk (return) from specific stock selection or industry and factor "bets," it can also include risk (return) from market timing decisions. Dividing portfolio active return by portfolio tracking error gives the information ratio, which is a risk adjusted performance measure. Contents 1 Definition 1.1 Formulas 1.2 Interpretation 2 Examples 3 References 4 External links Definition[edit] If tracking error is measured historically, it is called 'realized' or 'ex post' tracking error. If a model is used to predict tracking error, it is called 'ex ante' tracking error. Ex-post tracking error is more useful for reporting performance, whereas ex-ante tracking error is generally used by portfolio managers to control risk. Various types of ex-ante tracking error models exist, from simple equity models which use beta as a primary determinant to more complicated multi-factor fixed income models. In a factor model of a portfolio, the non-systematic risk (i.e., the standard deviation of the residuals) is called "tracking error" in the investment field. The latter way to compute the tracking error complements the formulas below but results can vary (sometim
Funds Money Managers Plan Sponsors Reference MaterialsArticles Concepts Statistics StatFACTS Links Conference Materials Dynamic Text Client ResourcesTraining/SupportRegional Training New User Online Training http://www.styleadvisor.com/resources/statfacts/tracking-error Weekly Online Training Template Library Guides Help VideosOnline Tutorials Quick Tip Videos DownloadsData Updates Software Beta Installs WebEx E-mail: * Password: * Remember me Request new password Updates Contact Us Site Map Home Reference Materials Articles Concepts Statistics StatFACTS Links Conference Materials Dynamic Text Contact tracking error 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 measures the consistency of excess returns. It is how to calculate 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 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 pe
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