FRM Part II · FRM Exam Part II · Portfolio Performance Evaluation
A manager's portfolio has monthly active returns with a standard deviation of 0.75%. Assuming independent monthly active returns, what is the annualised tracking error?
Annualised tracking error scales monthly active risk by the square root of 12 under independence. 0.75% times 3.464 is about 2.60%. Multiplying by 12 would wrongly assume perfectly correlated monthly active returns and overstate the risk at 9%.
- A9.00%
- B2.60%Correct
- C0.75%
- D6.50%
Explanation
Annualised tracking error = 0.75% x sqrt(12) = 0.75% x 3.464 = 2.598%, about 2.60%. 9.00% multiplies by 12 instead of the square root. 6.50% is a miscalculation using sqrt(75). 0.75% fails to annualise.
Did you get it right without looking?
One question tells you little. A timed set on Portfolio Performance Evaluation shows your real accuracy, how long you take and where you lose marks.
More Portfolio Performance Evaluation questions
- Using returns-based style analysis, an analyst regresses a fund's monthly returns on three style indices with weights constrained to be non-…
- A fund returned 11.0% over the year. Its custom style benchmark is 60% Index A and 40% Index B. Index A returned 12.0% and Index B returned …
- A fund returned 12% over a year, the risk-free rate was 3%, and the fund's return volatility was 15%. The fund's beta to its benchmark was 1…
- A pension fund evaluates an active equity manager by comparing returns with a custom benchmark. Which characteristic is essential for the be…
- Portfolio A earned 11% with a beta of 1.2. The risk-free rate is 3% and the market return was 9%. What is Portfolio A's Jensen's alpha?
- A risk officer sees that a fund's realized tracking error is 1.0%, far below the 4.0% limit, yet the fund holds a large overweight to one se…