what is the definition of "tracking error" in Asset Management Field?
Let X be your portfolio; let B be the chosen benchmark.
Then d=X-B is the portfolio of differences (which adds to zero)
then TE=std(d) is the tracking error. If you have a covariance matrix S for your assets, then
TE=((X-B)’S(X-B))^(1/2).
Tracking error “interpretation” is the uncertainty of the excess returns (that is, of the return of the portfolio vs the benchmark’s)
Tracking error is the standard deviation of the portfolio of differences:
Let X be your portfolio; let B be the chosen benchmark.
Then d=X-B is the portfolio of differences (which adds to zero)
then TE=std(d) is the tracking error. If you have a covariance matrix S for your assets, then
TE=((X-B)’S(X-B))^(1/2).
Tracking error "interpretation" is the uncertainty of the excess returns (that is, of the return of the portfolio vs the benchmark’s)
References :
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