Is Tracking error square root of Active Factor risk ?

CFA Level II
#1

Is Tracking error square root of Active Factor risk ? This area is a little confusing for me. I am confused when i should use the risk numbers as they are, and when i need to find their square roots and use them.

#2

Tracking error = (return from portfolio - return from benchmark) = active risk. No square root involved. However, active FACTOR risk is just one element of active risk active risk^2 = active specific risk^2 + active factor risk^2 Think of it as - your “risk” in a portfolio has 2 elements. Specific risk - the risk that an individual security will under/over perform Factor risk - the risk that your portfolio return will be affected by a specific factor (eg: inflation)

#3

so Tracking error is Alpha (excess return over a bench mark / factor). Tracking risk is square root of Active Factor risk. hmm kind of makes sense.

#4

No TE = stddev(Return of portfolio - Return of benchmark) = Active Risk Active Risk Squared = Active Factor Risk + Active Specific Risk So, tracking error is square root of Active Risk Squared Curriculum vol6 p404

#5

Damn! typo in my answer. Should be Tracking error = SD(return from portfolio - return from benchmark) = active risk SD=standard deviation Sorry - tracking error is NOT alpha as my post may have suggested

#6

tomkwong Wrote: ------------------------------------------------------- > No > > TE = stddev(Return of portfolio - Return of > benchmark) = Active Risk > > Active Risk Squared = Active Factor Risk + Active > Specific Risk > > So, tracking error is square root of Active Risk > Squared > > Curriculum vol6 p404 Yep, CFAI mock #1 has this as the third or fourth last question in the PM section. It was seriously just a matter of taking the sq rt of the active risk squared…and I f*cked it up.

#7

Whats up Zim? How are you feeling bud? Were you able to get some time off work?

#8

In mock 2 tracking risk= active risk squared ²

#9

sofianeB Wrote: ------------------------------------------------------- > In mock 2 tracking risk= active risk squared ² Sofiane, thats correct … tracking risk = active risk squared (which includes 1. factor risk and 2. active specific risk… just think it as a variance…of active risk. tracking error is : return portfolio - return on benchmark. if you standard deviate it that would be active risk or tracking risk.

#10

That’s not right. Tracking risk = square root of active risk squared. Mock2 answers spells it out in those exact words.

#11

AFJunkie Wrote: ------------------------------------------------------- > Whats up Zim? How are you feeling bud? Were you > able to get some time off work? Yeah, after I got out of the office at 10pm Tuesday, it’s been all killer no filler. Will go down with guns a’blazin’ tomorrow!!!

#12

those are components of the information ratio. Not so clear on that still. Does someone have the Info. Ratio down?

#13

Nice to see we all agree… I think I’ll try and forget what I just read above and follow my notecards on this.