Tracking Error - Variance vs. MAD

CFA General
#1

Hello,

I am taking the CFA leve l 1 in June 2016. Anyways, while reading the statistics section for Schweser, I found a question I was stumped on:

It asked what measurement should be used to track a portfolio that it attempting to mimick returns on the market. I thought the answer was MAD of tracking error (mean absolute deviation). They said this was correct, but variance/standard devation of tracking error was a better measurement.

Can anyone explain to me why this is the case? I am confused and what love to know the answer, (intuitively of course).

#2

Intrinsically, there’s nothing wrong with using MAD, and there’s nothing inherently better about standard deviation or variance.

The only reason that statisticians use σ and σ² is that they can do calculus with them, whereas they cannot do calculus with MAD.

Statisticians love calculus.