Skip to search form Skip to main content You are currently offline. Some features of the site may not work correctly. DOI: Coleman and Yuying Li and J. Coleman , Yuying Li , J. Henniger Published 1 July Computer Science Journal of Risk Tracking error minimization is commonly used by the traditional passive fund managers as well as alternative portfolio for example, hedge fund managers.
We propose a graduated non-convexity method to minimize portfolio tracking error with the total number of assets no greater than a specified integer K. The solution of this tracking error minimization problem is the global minimizer of the sum of the tracking error function and the discontinuous counting function. We attempt to track the… Expand.
View via Publisher. Save to Library Save. Create Alert Alert. Share This Paper. Background Citations. Methods Citations. Topics from this paper. Select basic ads. Create a personalised ads profile. Select personalised ads. Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. Tracking error is the divergence between the price behavior of a position or a portfolio and the price behavior of a benchmark.
This is often in the context of a hedge fund , mutual fund , or exchange-traded fund ETF that did not work as effectively as intended, creating an unexpected profit or loss. Tracking error is reported as a standard deviation percentage difference, which reports the difference between the return an investor receives and that of the benchmark they were attempting to imitate.
Since portfolio risk is often measured against a benchmark, tracking error is a commonly used metric to gauge how well an investment is performing. Tracking error shows an investment's consistency versus a benchmark over a given period of time.
Even portfolios that are perfectly indexed against a benchmark behave differently than the benchmark, even though this difference on a day-to-day, quarter-to-quarter, or year-to-year basis may be ever so slight. The measure of tracking error is used to quantify this difference. Tracking error is the standard deviation of the difference between the returns of an investment and its benchmark. Given a sequence of returns for an investment or portfolio and its benchmark, tracking error is calculated as follows:.
From an investor's point of view, tracking error can be used to evaluate portfolio managers. If a manager is realizing low average returns and has a large tracking error, it is a sign that there is something significantly wrong with that investment and that the investor should most likely find a replacement. It may also be used to forecast performance, particularly for quantitative portfolio managers who construct risk models that include the likely factors that influence price changes.
The managers then construct a portfolio that uses the type of constituents of a benchmark such as style, leverage, momentum, or market cap to create a portfolio that will have a tracking error that closely adheres to the benchmark. The net asset value NAV of an index fund is naturally inclined toward being lower than its benchmark because funds have fees, whereas an index does not.
A high expense ratio for a fund can have a significantly negative impact on the fund's performance.
However, it is possible for fund managers to overcome the negative impact of fund fees and outperform the underlying index by doing an above-average job of portfolio rebalancing , managing dividends or interest payments, or securities lending.
Beyond fund fees, a number of other factors can affect a fund's tracking error. One important factor is the extent to which a fund's holdings match the holdings of the underlying index or benchmark. Many funds are made up of just the fund manager's idea of a representative sample of the securities that make up the actual index. There are frequently also differences in weighting between a fund's assets and the assets of the index.
Illiquid or thinly-traded securities can also increase the chance of a tracking error, since this often leads to prices differing significantly from market price when the fund buys or sells such securities as a result of larger bid-ask spreads. Finally, the level of volatility for an index can also affect the tracking error. Sector , international , and dividend ETFs tend to have higher absolute tracking errors; broad-based equity and bond ETFs tend to have lower ones.
Management expense ratios MER are the most prominent cause of tracking error and there tends to be a direct correlation between the size of the MER and tracking error. But other factors can intercede and be more significant at times.
Such divergences are usually rare. In the case of a premium, the authorized participant typically arbitrages it away by purchasing securities in the ETF basket, exchanging them for ETF units, and selling the units on the stock market to earn a profit until the premium is gone. Viewed 4k times. What if it's not the case? Is there another approach? Improve this question. Community Bot 1. Add a comment. Active Oldest Votes. Improve this answer. John John 5, 20 20 silver badges 28 28 bronze badges.
I think they have no place in this context. George Wolfe George Wolfe 6 6 bronze badges. Sign up or log in Sign up using Google. Sign up using Facebook. Sign up using Email and Password. Post as a guest Name.
0コメント