Reading 9: Common Probability Distributions-LOS h 习题精选 center, border, interpret, 2011

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Session 3: Quantitative Methods: Application
Reading 9: Common Probability Distributions

LOS h: Define, calculate, and interpret tracking error.

 

 

Tracking error for a portfolio is best described as the:

A) portfolio return minus a benchmark return.

B) sample mean minus population mean.

C) standard deviation of differences between an index return and portfolio return.

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Tracking error is the difference between the total return on a portfolio and the total return on the benchmark used to measure the portfolio’s performance. The difference between a sample statistic and a population parameter is sampling error. The standard deviation of the difference between a portfolio return and an index (or any chosen benchmark return) is more often referred to as tracking risk.

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A portfolio begins the year with a value of $100,000 and ends the year with a value of $95,000. The manager’s performance is measured against an index that declined by 7% on a total return basis during the year. The tracking error of this portfolio is closest to:

A) ?2%.

B) ?5%.

C) 2%.

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Tracking error is the portfolio total return minus the benchmark total return. The portfolio return is ($95,000 ? $100,000) / $100,000 = ?5%. Tracking error = ?5% ? (?7%) = +2%.