What is a trecking error?
Tracking Error (TE) is a risk figure that quantifies the risk of deviations of a portfolio‘s return from the benchmark‘s returns (out-/underperformance)
TE is the same as the volatility of the out-/underperformance (RD)
What are the four techniques of active equity managment?
stock picking
sector rotation
market timing
hedging by applying derivatives
Tracking error should be very high
What is the sharpe ratio ?
takes into account the systematic and unsystematic risk
suitable for assess investment not fully diversified
What is the Decision Rule for the Sharpe Ratio?
the Asset with the highest Sr is the best
What is the treynor ratio?
consider only the systematic risk
good if only little unsystematic risk (well diversified)
What is the decision rule of the treynor ratio?
the portfolio with the highest treynor ratio is best, but only if they have the same benchmarc, i.e. beta is calculated against the same bechmarc
How can you apply tracking error in passive management?
the aim of passive management is to have a trackingerror as small as possible because you want to build a equal portfolio as the benchmarc
What is the decision rule for information ratio?
rule of thumb is IR= 0,5 good ; 0,75 very good; 1,0 excellent
What is the decision rule for the differential return?
a DR higher than 0 implies the amount of percentage the portfolio manager has beaten the market
What is the Jensen Alpha?
the jensen alpha is defined as the difference between the actual return and the return expected by the SML for the respective level of portfolio beta
What is the decision rule for the Jensen alpha?
if the alpha is bigger than 0 that implies how much the portfolio manager has beaten the market
Last changeda year ago