TrackingError: Calculate Tracking Error of returns against a benchmark

Description

A measure of the unexplained portion of performance relative to a benchmark.

Usage

TrackingError(Ra, Rb, scale = NA)

Arguments

an xts, vector, matrix, data frame, timeSeries or zoo object of asset returns

return vector of the benchmark asset

scale

number of periods in a year (daily scale = 252, monthly scale = 12, quarterly scale = 4)

Details

Tracking error is calculated by taking the square root of the average of the squared deviations between the investment's returns and the benchmark's returns, then multiplying the result by the square root of the scale of the returns.

$$ TrackingError = \sqrt{\sum\frac{(R_{a}-R_{b})^{2}}{len(R_{a})\sqrt{scale}}} $$

References

Sharpe, W.F. The Sharpe Ratio,Journal of Portfolio Management,Fall 1994, 49-58.

Examples

Run this code

# NOT RUN {
data(managers)
TrackingError(managers[,1,drop=FALSE], managers[,8,drop=FALSE]) 
TrackingError(managers[,1:6], managers[,8,drop=FALSE]) 
TrackingError(managers[,1:6], managers[,8:7,drop=FALSE])

# }