Dear David,
I would appreciate it if you can help me out with the following topic although I'm not sure if it is relevant to FRM exam.
Philippe Jorion mentioned on page 288 of chapter 11 Var Mapping in his book "Value at Risk - The new Benchmark for Managing Financial Risk (3rd edition)" that:
"Relative to the original index, the tracking error can be measure in terms of variance reduction, similar to an R squared in a regression. The variance improvement is 1 -(0.43/1.99)squared = 95.4% which is in line with the explanatory power of the first factor in the variance decomposition detailed in Chatper 8."
I don't really capture what the he means, especially how he relates Tracking error to an R squared in a regression and the variance improvement. Please kindly enlighten me if this topic is important for FRM exam. Thank you.
Cheers
Liming
05/10/2009
I would appreciate it if you can help me out with the following topic although I'm not sure if it is relevant to FRM exam.
Philippe Jorion mentioned on page 288 of chapter 11 Var Mapping in his book "Value at Risk - The new Benchmark for Managing Financial Risk (3rd edition)" that:
"Relative to the original index, the tracking error can be measure in terms of variance reduction, similar to an R squared in a regression. The variance improvement is 1 -(0.43/1.99)squared = 95.4% which is in line with the explanatory power of the first factor in the variance decomposition detailed in Chatper 8."
I don't really capture what the he means, especially how he relates Tracking error to an R squared in a regression and the variance improvement. Please kindly enlighten me if this topic is important for FRM exam. Thank you.
Cheers
Liming
05/10/2009
