Correct Use of Ex-Ante Tracking Error in Portfolio Management

7 Pages Posted: 22 Aug 2010

Date Written: August 20, 2010

Abstract

We review the concept of ex-ante tracking error measurement in portfolio management, providing correct definition with respect to time projection of underlying factors. We emphasize the difference between the process of time projection and portfolio aggregation of returns as well as the conceptual difference between ex-ante and ex-post tracking error. The ex-ante tracking error is defined in terms of risk exposures of investment portfolio. Decomposition of analyzed risk measure is provided. Simple example shows calculation of ex-ante tracking error for the investment portfolio that tracks world equity indexes and partially hedges foreign currency exposure.

Keywords: ex-ante tracking error, compounded returns, risk exposures

JEL Classification: C10, G11

Suggested Citation

Stulajter, Frantisek, Correct Use of Ex-Ante Tracking Error in Portfolio Management (August 20, 2010). Available at SSRN: https://ssrn.com/abstract=1662577 or http://dx.doi.org/10.2139/ssrn.1662577

Frantisek Stulajter (Contact Author)

Tatra Asset Management ( email )

Hodžovo nám. 3
P.O.BOX 108
810 00
Slovakia

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