Information Ratio

[Kashif Khalid]

Hi,

is non-systemic risk the same as tracking error?

also, on slide 8 of Amenc in your lecture slides, can you kindly indicate how you get the denominator in the IR (alpha) from the values in the spreadsheet, say for example the first column where the IR (alpha) is 0.8.

I'm guessing the numerator in these ratios is simply Jensen's alpha, so how do you get the std deviation of this?

Kind Regards

Kashif

 

[ShaktiRathore]

Hi
Traking error is stdDev(Rp-Rb) which is std deviation of portfolio returns wrt the benchmark. That is how much returns deviate from the benchmark on average is measured by tracking error.
If benchmark is CAPM then Rb=Rf+beta*(ER(m)-Rf) where beta is beta of portfolio.
Rp with systematic risk beta is R(p)=Rf+beta*(ER(m)-Rf)+e/alpha where e/alpha is nonsystematic component of return.
From above eqn,R(p)=Rb+alpha/e=>Rp-Rb=alpha/e=>std dev(Rp-Rb)=stdDev(alpha/e) is the non systematic risk which is a special case of tracking error when benchmark is market CAPM.
Thanks

 

[Kashif Khalid]

Thanks Shakti

How about slide 8 in the slide deck. how do we calculate IR (alpha/residual) based on the data of that slide?

for example

in the first column the IR (alpha) is 0.8 and in the third it's 0.48. basically how do you calc the std deviation of alpha when we don't have timeseries alpha in the example?

 

[ShaktiRathore]

Hi
IR=alpha/stdDev(alpha) so stdDev(alpha)=alpha/IR calculate stdDev of alpha using this equation where IR and alpha are given.
Thanks

 

[Kashif Khalid]

Thanks Shakhti. I agree I can re-arrange the equation but there is no indication of the TE it uses on that specific slide. do you have access to the slide?

 

[ShaktiRathore]

Hi
No i dont have.
Thanks