Tracking Error

Tax Loss Harvesting

Marc Odo
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One of the toughest questions an investor faces is, “When should I cut my losses and sell out of a position?” Numerous behavioral finance studies explore the idea that investors are loath to realize a loss and will wait years in order to get back to the break-even point. Obviously such a mindset ignores the opportunity cost of a forgone investment in a more attractive alternative. Another opportunity cost that should be considered is the value of the losses of the underwater positions to offset capital gains of the winners, assuming they are held in a taxable account.

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Tracking Error

Tracking Error (also known as 'active risk') is the annualized standard deviation of excess return to the benchmark. Like R-Squared, Tracking Error is calculated using the common date range of the benchmark and the weighted portfolio return series.



where:

Tracking Error
std = standard deviation

 
 

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