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The standard deviation of the difference between a portfolio's returns and its benchmark's returns.
The standard deviation of the difference between a portfolio's returns and its benchmark's returns.
Tracking Error quantifies how closely a portfolio follows its benchmark. Active managers target specific tracking error budgets; passive vehicles target zero. Tracking error is the denominator of the Information Ratio and the core constraint in risk-bounded active mandates.
Annualized tracking error is the standard metric in active mandate guidelines.
Decomposes into factor exposures (systematic) and stock selection (idiosyncratic).
Ex-ante tracking error (forecast) and ex-post (realized) must be monitored separately.
Portfolio optimization is the construction of an asset allocation that maximises risk-adjusted return subject to investor constraints. The classical framework is mean-variance optimisation (Markowitz, 1952); the modern framework is factor-based, with the portfolio constructed to express a target set of factor exposures and to harvest the corresponding risk premia.
Quantitative risk management is the measurement, monitoring, and control of financial risk across a firm. It spans market risk (the risk of losses from price movements), credit risk (the risk of a counterparty defaulting), operational risk (the risk of failures of internal processes, people, and systems), and regulatory risk (the risk of failing to comply with capital and reporting requirements).