Using Tracking Error
Introduction
Given an asset or portfolio of assets and a benchmark, the relative standard deviation of returns between the asset or portfolio of assets and the benchmark is called tracking error.
Tracking Error
The function inforatio
computes
tracking error and returns it as a second argument
load FundMarketCash
Returns = tick2ret(TestData);
Benchmark = Returns(:,2);
[InfoRatio, TrackingError] = inforatio(Returns, Benchmark)
which gives the following results:
InfoRatio = 0.0432 NaN -0.0315 TrackingError = 0.0187 0 0.0390
Tracking error, also know as active risk, measures the volatility of active returns. Tracking error is a useful measure of performance relative to a benchmark since it is in units of asset returns. For example, the tracking error of 1.87% for the fund relative to the market in this example is reasonable for an actively managed, large-cap value fund.
See Also
sharpe
| inforatio
| portalpha
| lpm
| elpm
| maxdrawdown
| emaxdrawdown
| ret2tick
| tick2ret