# Calculation of Tracking Risk

Portfolio A : Weight 20%, Expected Risk 20% Portfolio B : Weight 30%, Expected Risk 15% Broad Market Index : Weight 50% What is the (Expected) Tracking Risk ?

is it sqrt of square of (0.2 X 0.2) + (0.3 X 0.15) + (2 X0.2X 0.2 X.15 X.3 X.5) No idea basically

Sorry, the Broad Market Index is the benchmark and its expected Risk is 5%.

wouldn’t we need to know the returns of the market as well as the portfolios? Tracking error = Standard deviation of excess returns to a benchmark, so I’m having trouble incorporating the given information into a formula.

std deviation is bassically a risk and hence I incorporated. I am shooting from my a\$\$ here …no idea

I was thinking the same thing as you except my first 2 terms were squared…not sure how to incorporate that benchmark data.

Only the calculation of tracking (active) risk is required here.

8.5%?

cfaboston28 Wrote: ------------------------------------------------------- > 8.5%? How do you get 8.5% ?

^ that’s what I got with the method I described earlier (squaring the first terms)…however, it didn’t incorporate the benchmark at all…eh, fail for me on this topic.

sqrt((.2^2)((.2-.05)^2)+(.3^2)((.15-.05)^2)+(.5^2)((.05-.05)^2)) = 4.24%?

AMC Wrote: ------------------------------------------------------- > cfaboston28 Wrote: > -------------------------------------------------- > ----- > > 8.5%? > > How do you get 8.5% ? What is the answer?

TheChad Wrote: ------------------------------------------------------- > sqrt((.2^2)((.2-.05)^2)+(.3^2)((.15-.05)^2)+(.5^2) > ((.05-.05)^2)) = 4.24%? You are right !

8.5 * 0.5 (market) can get you the same answer.

mp2438 Wrote: ------------------------------------------------------- > ^ that’s what I got with the method I described > earlier (squaring the first terms)…however, it > didn’t incorporate the benchmark at all…eh, fail > for me on this topic. I made same mistake !

AMC, Where is this problem for? Schweser?

cfaboston28 Wrote: ------------------------------------------------------- > 8.5 * 0.5 (market) can get you the same answer. What is your logic (calculation) ?

cfaboston28 Wrote: ------------------------------------------------------- > AMC, > > Where is this problem for? Schweser? q-bk of 2009.

AMC Wrote: ------------------------------------------------------- > cfaboston28 Wrote: > -------------------------------------------------- > ----- > > 8.5 * 0.5 (market) can get you the same answer. > > What is your logic (calculation) ? No logic. I would get zero in this question