Calculate Tracking Error Volatility
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the benchmark or index it was meant to mimic or beat. Tracking error is sometimes called active risk. There are two ways to measure tracking error. tracking error volatility formula The first is to subtract the benchmark's cumulative returns from the portfolio's
Tracking Error Volatility Definizione
returns, as follows: Returnp - Returni = Tracking Error Where: p = portfolio i = index or
Tev Tracking Error Volatility
benchmark However, the second way is more common, which is to calculate the standard deviation of the difference in the the portfolio and benchmark returns over time. The formula
Tracking Error Volatility Wikipedia
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%, then using the first formula above, we would say calcolo tracking error volatility 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 portfolio and the benchmark have securities in common 2. Differences in market capitalization, timing, investment style, and oth
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