What is a tracking error and how it is calculated ?
I dont think the LOS requires us to calculate this? Somebody correct me if I’m wrong. I haven’t seen detailed explanations in schweser or the cfai books. From memory CFAI books have a short answer question somewhere in quant that you can look at however I don’t think its a explicit requirement of the LOS’s.
Well, I don’t remember seeing any formula for tracking error… just that it is the error that arises when you track an index because you don’t replicate an index which has many stocks… you just approximate… My guess would be that it would be something like (Difference in your return and index’s return / Return of the index) * 100 Just a guess…
I am pretty sure you need to know this. Look at the Learning Outcomes for L1V1 > Reading 9 > h. define, calculate, and interpret tracking error. Page 493. The information for this topic is splattered all over the place, but it helps to know that tracking error is also known as tracking risk. Look at problem 4 in L1V1 > Reading 7 (page 413).
You are right. The example on page 505 gives the definition of tracking error and tracking risk (which apparently are two different things) Did not remember this at all! Oyster Wrote: ------------------------------------------------------- > I am pretty sure you need to know this. Look at > the Learning Outcomes for L1V1 > Reading 9 > h. > define, calculate, and interpret tracking error. > Page 493. > > The information for this topic is splattered all > over the place, but it helps to know that tracking > error is also known as tracking risk. > > Look at problem 4 in L1V1 > Reading 7 (page 413).
information ratio= active return/active risk= tracking return/tracking risk. Tracking risk I believe is the volatility of alpha