TITLE

The error of tracking error

AUTHOR(S)
Israelsen, Craig L.; Cogswell, Gary F.
PUB. DATE
March 2007
SOURCE
Journal of Asset Management;Mar2007, Vol. 7 Issue 6, p419
SOURCE TYPE
Academic Journal
DOC. TYPE
Article
ABSTRACT
As the application of modern portfolio theory has evolved within an equities market increasingly focused on passively managed portfolios, tracking error (ie performance variance from a benchmark index) has emerged as a primary measure for evaluating the performance of managers, where low tracking error is typically viewed as a positive in terms of risk management. Ironically, actively managed mutual funds with low tracking error exhibit lower alpha, higher beta, and lower average performance compared to funds with high tracking error. Ranking funds using the information ratio incorporates tracking error as the denominator (IR=alpha/tracking error). High IR funds demonstrate lower volatility of return, higher alpha, lower beta, and higher returns than funds with low IR. As additional irony, high IR funds demonstrate significantly higher tracking error than low IR funds.Journal of Asset Management (2007) 7, 419�424. doi:10.1057/palgrave.jam.2250051
ACCESSION #
24461990

Tags: TRACKING stock;  BENCHMARKING (Management);  PORTFOLIO management (Investments);  EQUITY stake;  STOCK exchanges;  RATE of return;  RISK management in business

 

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