Tracking error formula in 1.b.5

Discussion in 'P1.T1. Foundations of Risk (20%)' started by Gary2584, Aug 10, 2012.

  1. Gary2584

    Gary2584 New Member

    Hi David,

    In the practice bag spreadsheet for the tracking error calculation, i am confused on the logic behind the formula used for calculation. TE = Voltality(R(portfolio) - R(benchmark portfolio)) but am not able to correlate the above mentioned formula to the one used in the spreadsheet.

    Please advise.

    Thanks,
    Gary
  2. Hi Gary,

    can i ask you to leave open (not post in) David's Notebook? I am moving this to Foundations

    this is the only way to get an ex ante Tracking error: as the variance(A - B) = variance(A) + variance (B) - 2*covariance, the standardDeviation(P - M) = SQRT[Variance(P - M)] = sqrt[volatility(P)^2 + volatility(M)^2 - 2*vol(P)*vol(M)*correlation(P,M)]; i.e., elegant application of variance property

    Now that you ask me about this, I noticed that I need to revise this XLS to make a note that this TE is an ex ante tracking error based on active return/active risk rather than residual return/residual risk.

    Thanks, David
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  3. Gary2584

    Gary2584 New Member

    Hi David,
    Thanks for letting me know, as i was kinda confused where to put my query relating to the Focus review.

    Gary :)
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