IDEAS home Printed from https://ideas.repec.org/a/pal/assmgt/v3y2002i3d10.1057_palgrave.jam.2240081.html
   My bibliography  Save this article

Are asset managers properly using tracking error estimates?

Author

Listed:
  • R Zenti

    (Ras Asset Management SGR, Piazza Velasco 7/9.)

  • M Pallotta

    (Risk Management team of Ras Asset Management)

Abstract

In the investment community, tracking error is often regarded as the single most important risk measure, and many active asset management companies use tracking error as a basis for keeping a portfolio's relative risk under control. Recently, the investment community has become aware of some shortfalls of tracking error. One of the main pitfalls is that ex-ante and ex-post tracking errors differ, since portfolio weights are stochastic and market drivers have changing distributions. This conclusion can be extended to other risk indicators, eg relative value at risk. This paper shows that, if portfolio managers follow a risk policy and on a regular basis they keep their portfolio relative risk in a given range, ex-ante tracking error does not differ in a statistical sense from ex-post tracking error, and the stochastic nature of portfolio weights becomes almost irrelevant. Therefore, if the goal is to avoid wrong measurement of tracking error and subsequent troubles with clients, the main focus of active asset management companies should be on two points: (i) forecasting risk correctly; (ii) implementing a risk policy on a regular basis.

Suggested Citation

  • R Zenti & M Pallotta, 2002. "Are asset managers properly using tracking error estimates?," Journal of Asset Management, Palgrave Macmillan, vol. 3(3), pages 279-289, December.
    • Handle: RePEc:pal:assmgt:v:3:y:2002:i:3:d:10.1057_palgrave.jam.2240081
    DOI: 10.1057/palgrave.jam.2240081
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1057/palgrave.jam.2240081
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1057/palgrave.jam.2240081?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Luca Riccetti, 2012. "Using tracking error volatility to check active management and fee level of investment funds," Global Business and Economics Review, Inderscience Enterprises Ltd, vol. 14(3), pages 139-158.
    2. Nadima El-Hassan & Paul Kofman, 2003. "Tracking Error and Active Portfolio Management," Australian Journal of Management, Australian School of Business, vol. 28(2), pages 183-207, September.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pal:assmgt:v:3:y:2002:i:3:d:10.1057_palgrave.jam.2240081. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.palgrave-journals.com/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.