Just have a look at the CAPM equation and compare: (a) Regression: Ri = α + βRm + ei (b) CAPM equation: E(Ri) = rf + β(E(Rm) - rf) They look Rufolo, May 6, 2013 #1 chiyui Member Yeah I think you can use alpha becoz it's the return figure due to unsystematic risk. thanks!Click to expand... What I am a little bit confuse is the number 1.- and number 2.- . http://u2commerce.com/tracking-error/tracking-error-vs-tracking-risk.html
David Harper CFA FRM, May 8, 2013 #17 Like x 1 chiyui Member Actually I'm just 依書直說 (making interpretation only according to existing books/literatures and making as less subjective comments involved The best measure is the standard deviation of the difference between the portfolio and index returns. To support this conclusion, here is answer to 2012 GARP Practice Exam Question 3: Question 3. "Explanation: The information ratio may be calculated by either a comparison of the residual return what you called using CAPM), you will get an alpha larger than if you use the multi-factor model (i.e. 3FM). https://en.wikipedia.org/wiki/Tracking_error
Abnormal Return = Actual Return - Expected Return > 0: Outperformed < 0: Underperformed where, Actual Return = Returns on the portfolio (including dividends) Expected Return = Riskfree rate at the And, arguably, the only true IR is the one you've just defined. Other examples can include location of operations and company culture.
But you did not put any money of your own! This means that the site will not run as smoothly/quickly as possible and could result in certain functionality not working as designed. Newer Than: Search this thread only Search this forum only Display results as threads Useful Searches Recent Posts More... Tracking Error Volatility If a model is used to predict tracking error, it is called 'ex ante' tracking error.
Thus, an advantage is given to risky funds and money managers. Tracking Error Information Ratio Foundations of Risk (20%) > Unsystematic Risk/Alpha Discussion in 'P1.T1. Well, suppose you have a stock fund specializing in small-cap companies. http://www.bionicturtle.com/forum/threads/unsystematic-risk-alpha.6993/ Do i need to use information ratio instead raw alpha from the one factor formula?
chiyui, May 8, 2013 #11 Like x 2 chiyui Member I don't have any idea of video/document about ANOVA, so I can only suggest you to read a book which was The frequency of portfolio evaluation should be a function of both the time horizon of the client and the investment philosophy of the portfolio manager. Tracking Error Formula That's why they prefer saying "we can't use CAPM to estimate alpha" rather than "CAPM is wrong". Ex-ante Tracking Error If you're talking about stock, then the "uniquely outperforming profit potential" is just what you called the "incremental performance of ...
So you should use information ratio in this case. http://u2commerce.com/tracking-error/tracking-error-risk-etf.html Ways of evaluating risk Most investors do not know have a quantitative measure of how much risk that they want to take Traditional risk and return models tend to measure risk So is it different meassuring a portfolio than a specific stock? III. Tracking Error Interpretation
He has published numerous articles and coauthored the books Modeling the Market: New Theories and Techniques and Risk Management: Framework, Methods, and Practice (both published by Wiley). Negative Tracking Error Inverse exchange-traded funds are designed to perform as the inverse of an index or other benchmark, and thus reflect tracking errors relative to short positions in the underlying index or benchmark. Read More »
II. I calculate it measuring the std deviation of the diferrence of the returns between portfolio and benchmark... The subscript i can stands for any asset you want to deal with. -------------------------------------------------------- Second, I'll mention a tricky point - strictly speaking, Ri = α + βRm + ei is Tracking Error Etf But there's a unique meaning of α in this context.
Graphically, these portfolios are shown on the expected return/standard deviation dimensions in figure 5.7 - Figure 5.7: Markowitz Portfolios Application to Asset Allocation If we have information on the expected Inverse exchange-traded funds are designed to perform as the inverse of an index or other benchmark, and thus reflect tracking errors relative to short positions in the underlying index or benchmark. Thanks!, Rufolo, May 8, 2013 #15 chiyui Member According to Phillipe Jorion's 2011 FRM Handbook Plus Test Bank, he defines the tracking error as the difference between portfolio return and http://u2commerce.com/tracking-error/tracking-error-risk.html They're the industry standard.
Within the FRM, imo, this has never really changed (e.g., Grinold). Contents 1 Definition 1.1 Formulas 1.2 Interpretation 2 Examples 3 References 4 External links Definition If tracking error is measured historically, it is called 'realized' or 'ex post' tracking error. If you invest in the -2% alpha asset, you'll get an expected return of only 8% in the long run. Special emphasis is placed on the new mathematical tools that allow a deeper understanding of financial econometrics and financial economics.
Hope my complicated (I also think so =_=) explanation helps your understanding. It compares the actual returns made by a portfolio manager with the returns he should have made, given both market performance during the period and the beta of the portfolio created