Low High Tracking Error
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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 annualized tracking error formula 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 created by taking the difference between the manager return and the tracking error cfa 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 periods of outperformance and underperformance versus the benchmark. An investor would prefer high tracking error if there was a high degree of outperformanc
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. The first is to subtract the benchmark's
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cumulative returns from the portfolio's returns, as follows: Returnp - Returni = Tracking tracking error vs alpha Error Where: p = portfolio i = index or benchmark However, the second way is more common, which is
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to calculate the standard deviation of the difference in the the portfolio and benchmark returns over time. The formula is as follows: How it works (Example): Let's assume you invest in the XYZ http://www.styleadvisor.com/resources/statfacts/tracking-error 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 that the XYZ Company mutual fund had a 0.5% tracking error. As time goes by, there will be more periods http://www.investinganswers.com/financial-dictionary/mutual-funds-etfs/tracking-error-4970 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 other fundamental characteristics of the portfolio and the benchmark 3. Differences in the weighting of assets between the portfolio and the benchmark 4. The management fees, custodial fees, brokerage costs and other expenses affecting the portfolio that don't affect the ben
Retirement Personal Finance Trading Financial Planning Guide Small Business Reference Dictionary Term Of The Day Federal Debt The total http://www.investopedia.com/ask/answers/06/trackingexpost.asp amount of money that the United States federal government owes to creditors. ... Read More » Latest Videos How Much Should I Save for Retirement? The Bully Pulpit: PAGES Guides Stock Basics Economics Basics Options Basics Exam Prep Series 7 Exam CFA Level 1 Series 65 Exam Simulator Stock tracking error 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 Insights Newsletters Site Log In Advisor Insights Log In Is tracking error a significant measure for determining ex-post risk? By Casey low high tracking Murphy A: Before we answer your question, let's first define tracking error and ex-post risk. Tracking error refers to the amount by which the returns of a stock portfolio or a fund differ from those of a certain benchmark. As you might expect, a fund that has a high tracking error is not expected to follow the benchmark closely, and it is generally seen as being risky. The other component of the question is ex-post risk, which is a measure of the variance of an asset's returns relative to a mean value. In other words, ex-post risk is the statistical variance of an asset's historical returns. Many individuals would argue that tracking error is not the best measure to determine ex-post risk because it looks at the returns of a portfolio relative to a benchmark rather than looking at the variability in the portfolio's returns. Tracking error can be a useful tool when determining how closely a portfolio mimics a stable benchmark, or how efficient a portfolio's manager