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I am currently doing a master program project regarding tracking errors. My assignment is to evaluate following question:

How to find out the correlation structure of the passive (=second order/sub-classes tracking errors) tracking error? Research and summarize possible ways to analyze the correlation structure of tracking errors (Idea: Especially focus on the relationship between returns and tracking errors)

Since I found very limited literature regarding the question, I would appreciate any suggestions, literature, tips etc.

Thank you in advance.

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  • $\begingroup$ To clarify the question (as I understand it), I would say: Many institutional investors, such as pension and endowments compare their performance to a predefined benchmark or index. This is called the primary tracking error $e_t=P_t-B_t$. Often the investor hires specific investment managers in various asset sub-classes, such as corporate debt or US small cap equity, etc. The client compares the performance of each sub-manager to the performance of a well defined passive benchmark, and these differences are known as sub-class tracking errors. You want to understand how these are correlated. $\endgroup$ – Alex C Jan 24 '16 at 15:11
  • $\begingroup$ Just thinking about it, they would seem to be pretty much uncorrelated with each other. And I have never heard the subject discussed. Which makes me think I am probably misunderstanding the question. $\endgroup$ – Alex C Jan 24 '16 at 20:19
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    $\begingroup$ It is unclear what you are asking. Please provide links to references or define terms in the question directly. $\endgroup$ – Richard Jan 25 '16 at 8:10

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