Session 16= Information Ratio

Hi, I was doing the problem # 12 In Schwesers Book #5 and did not get the same answer for the information ratio calculation : The formula is = Active Return / active risk where active risk is defined as the Stand. Dev. of portfolio - Std. of Benchmark. Right ? In the example, the Fund A has STD of 3.24 and makt STD is 3.55. My calculation is 3.24-3.55 = -.31 correct ? Well, s’s solution has .43 ? Can anybody explain this ? Am I not reading it right ? Thanks,

What page? Make sure they didn’t give you Variance

Found it. They are dividing by tracking error not active risk, Wonder if its in errata?

sig(A) - sig(M) is not tracking error. did you ever see a tracking error being negative?

I know what tracking error is, I am saying they are using tracking error I am not saying they are right.

derswap07 Wrote: ------------------------------------------------------- > Hi, > > I was doing the problem # 12 In Schwesers Book #5 There are more than one #12 in a session :slight_smile: Please specify page number to avoid confusion. > and did not get the same answer for the > information ratio calculation : > > The formula is = Active Return / active risk > where active risk is defined as the Stand. Dev. of > portfolio - Std. of Benchmark. Right ? NO. active risk (or aka tracking error) is the standard deviation of the active return. See definition of IR. - sticky > > In the example, the Fund A has STD of 3.24 and > makt STD is 3.55. > My calculation is 3.24-3.55 = -.31 correct ? Well, > s’s solution has .43 ? > > Can anybody explain this ? Am I not reading it > right ? > > Thanks,

Sucks, there are two Information ratio calcs.

IR is excess return / tracking error. Tracking error is the standard deviation of active return, or Standard Deviation (Rp-Rb), and the use of tracking error in the denominator of information ratio is correct.

Tracking error, std of alpha, tracking risk are all the same thing. CFAI and Schweser use all those terms to confuse us.

Hi, If you look at the formula on page 39 in book 5, it gives active risk = std ( Portfolio-benchmark). So, we can call it std of alpha. As I understand, tracking error applies to the returns not std. Can anybody clarify this for me ?

tracking error = active risk = std dev. (alpha)

derswap07 Wrote: ------------------------------------------------------- As I understand, > tracking error applies to the returns not std. > tracking error (or active risk, or …) is a std measure applies to the excess returns over bm. expand the given equation, std(Rp - Rm) = sqrt(var(Rp) + var(Rm) - 2*cov(Rp, Rm))

I think these terms get very confused as they are used interchangibly but: Tracking Error = Alpha = Return of Portfolio - Benchmark Tracking Error Risk = Active Risk = Tracking Risk = Std Deviation of Tracking Error or Alpha However, Tracking Error is usually used in a Return sense and a Risk sense, I guess you have to read it in the context it is being stated. I bet if you look up Tracking Error on Google or Yahoo you will find that it will define it as both a Return measure and a Risk Measure…

If tracking error = STD of active risk, then why there is a difference in my calculations of the problem on page 54-book 5 ? I should get the same answer-whether I use tracking error or STD of alpha ??

Thats what I was thinking, something is F’d

No you used this: "where active risk is defined as the Stand. Dev. of portfolio - Std. of Benchmark. Right ? " Active Risk is the Std Deviation of your Alpha or Tracking Error. You can’t subtract teh Std dev of the portfolio from the std dev of the benchmark…

Also, I dont have the Question so I can’t help any further.

bigwilly Wrote: ------------------------------------------------------- > No you used this: "where active risk is defined as > the Stand. Dev. of portfolio - Std. of Benchmark. > Right ? " > > Active Risk is the Std Deviation of your Alpha or > Tracking Error. You can’t subtract teh Std dev of > the portfolio from the std dev of the benchmark… Isn’t alpha = portfolio - benchmark ? Q is on the book 5- page 54

Yes. That is Alpha. I believe you were looking for Tracking Risk aka Active Risk which is the std deviation of your excess returns. If you post hte question I can try to help better.

It’s on page 54 -book 5 -too long to post