Hi The following is an excerpt from a CFAI book: Risk budgeting – the client will allow some managers to have a large tracking errors, because they expect to add value in their segment, but will allow some other managers to have only a small tracking error. I am trying to understand how a client can allocate tracking errors before an evaluation period. How can you figure what std dev the manager’s future returns will have? Thanks, MG.
Nobody can predict the future. They have to use historical risk/return performance in order to decide which managers has historically added the most value on a risk-adjusted basis.
McLeod81 , Thanks.