Why is the term “residual risk” used in the meaning of “tracking error” in http://www.garp.org/media/613028/frm%20practice%20exam052711.pdf , problem 9, on page 22?
Expected residual return = information ratio * residual risk
I just started reading this. From what I understood, Tracking error is the standard deviation between portfolio return and benchmark return. So, residual risk is like the remaining risk comparing with benchmark represent by standard deviation.
And tracking error, mot residual risk, is in the denominator of information ratio.
Residual risk is orthogonal to benchmark, but tracking error is not
Can you post a link to the 2012 GARP exams. I hate the software they force you to download to obtain them.