$10.$a$.$Compute the tracking error from the following information:

Month Portfolio A$\text{'}$s Return Benchmark Index Return

January $2\mathrm{.}15\%1\mathrm{.}65\%$

February $0\mathrm{.}89\%-0\mathrm{.}10\%$

March $1\mathrm{.}15\%0\mathrm{.}52\%$

April $-0\mathrm{.}47\%-0\mathrm{.}60\%$

May $1\mathrm{.}71\%0\mathrm{.}65\%$

June $0\mathrm{.}10\%0\mathrm{.}33\%$

July $1\mathrm{.}04\%2\mathrm{.}31\%$

August $2\mathrm{.}70\%1\mathrm{.}10\%$

September $0\mathrm{.}66\%1\mathrm{.}23\%$

October $2\mathrm{.}15\%2\mathrm{.}02\%$

November $-1\mathrm{.}38\%-0\mathrm{.}61\%$

December $-0\mathrm{.}59\%-1\mathrm{.}20\%$

b$.$Would the tracking error computed in part a be a backward$-$looking or forward$-$looking tracking error?

c$.$Compare the tracking error found in part a to the tracking error found for Portfolios A is $9\mathrm{.}30$ and B in $79\mathrm{.}13.$

What can you say about the investment management strategy pursued by this portfolio manager?

Month Portfolio A$\text{'}$s Return Benchmark Index Return Active Return Mean Active Return Difference Differences Squared

January $2\mathrm{.}15\%1\mathrm{.}65\%0\mathrm{.}50\%0\mathrm{.}2342\%0\mathrm{.}2658\%0\mathrm{.}002500\%$

February $0\mathrm{.}89\%-0\mathrm{.}10\%0\mathrm{.}99\%0\mathrm{.}2342\%0\mathrm{.}7558\%0\mathrm{.}009801\%$

March $1\mathrm{.}15\%0\mathrm{.}52\%0\mathrm{.}63\%0\mathrm{.}2342\%0\mathrm{.}3958\%0\mathrm{.}003969\%$

April $-0\mathrm{.}47\%-0\mathrm{.}60\%0\mathrm{.}13\%0\mathrm{.}2342\%-0\mathrm{.}1042\%0\mathrm{.}000169\%$

May $1\mathrm{.}71\%0\mathrm{.}65\%1\mathrm{.}06\%0\mathrm{.}2342\%0\mathrm{.}8258\%0\mathrm{.}011236\%$

June $0\mathrm{.}10\%0\mathrm{.}33\%-0\mathrm{.}23\%0\mathrm{.}2342\%-0\mathrm{.}4642\%0\mathrm{.}000529\%$

July $1\mathrm{.}04\%2\mathrm{.}31\%-1\mathrm{.}27\%0\mathrm{.}2342\%-1\mathrm{.}5042\%0\mathrm{.}016129\%$

August $2\mathrm{.}70\%1\mathrm{.}10\%1\mathrm{.}60\%0\mathrm{.}2342\%1\mathrm{.}3658\%0\mathrm{.}025600\%$

September $0\mathrm{.}66\%1\mathrm{.}23\%-0\mathrm{.}57\%0\mathrm{.}2342\%-0\mathrm{.}8042\%0\mathrm{.}003249\%$

October $2\mathrm{.}15\%2\mathrm{.}02\%0\mathrm{.}13\%0\mathrm{.}2342\%-0\mathrm{.}1042\%0\mathrm{.}000169\%$

November $-1\mathrm{.}38\%-0\mathrm{.}61\%-0\mathrm{.}77\%0\mathrm{.}2342\%-1\mathrm{.}0042\%0\mathrm{.}005929\%$

December $-0\mathrm{.}59\%-1\mathrm{.}20\%0\mathrm{.}61\%0\mathrm{.}2342\%0\mathrm{.}3758\%0\mathrm{.}003721\%$

Mean Active Return $0\mathrm{.}2342\%0\mathrm{.}0075\%$ Variance

Sum of Port. Returns $2\mathrm{.}8100\%0\mathrm{.}8687\%$ Standard Deviation

Tracking error in basis points $=86\mathrm{.}87$

Tracking error in basis points annualized $=300\mathrm{.}91$