Tracking Error

[agushn07]

Hi,
I just want to quote your example on page 29 (foundations study notes) below :

For example, assume that portfolio (P) has a standard deviation of 20% and the index benchmark (B) has a standard deviation of 10%. Further, assume the correlation between the portfolio and the benchmark is 50%. The tracking error volatility is given by:

Your Answer :

TEV^2 = 2TE = 2P - 2PB + 2B
= (10%)^2 – (2)(50%)(10%)(20%) + (20%)^2

It makes me confuse because std deviation P = 20% and std deviation B = 10%

So, I think the right answer is : (20%)^2 – (2)(50%)(20%)(10%) + (10%)^2

Thx for answer!

 

[David Harper CFA FRM]

Hi,

I see your point, but I don't see this as an error: it's the same difference: Var(A-B) = VAR(A)+VAR(B) -2*COV(A,B). You are right the 10 and 20 aren't entered in the same order, but it doesn't matter to my thinking: both are positive (added) terms. The formula with numbers is still correct...David

 

[agushn07]

sorry David, I'm not finish my calculation. I thought the answer will be different If 10 and 20 entered in the different place. I wasn't careful.

I have more questions..., do you have practice questions for Foundations? I just want to test my self with foundations material.

Thank you David!

 

[David Harper CFA FRM]

...no problem, don't get me wrong: I will switch them for the update, consistent is better!

we have more questions coming, they will include Foundation specifically, we started with (frankly) the more relevant Gujarati and Hull....new question sets publish on third column as they are ready...David