[R-SIG-Finance] Incorrect Formula in table.CAPM?

devlinme at mac.com devlinme at mac.com
Fri Sep 17 14:43:03 CEST 2010

I've been getting up to speed on the Performance Analytics package, and there's one formula I'm having some trouble reconciling with some manual results I have done in spreadsheets.  The table.CAPM function has a tracking error calculation that looks like this:

tracking.error = sqrt(sum(merged.assets[, 1] - merged.assets[, 
                2])^2/(length(merged.assets[, 1]) - 1)) * sqrt(scale)

This gives different results than the TrackingError function (which just uses the standard deviation function).  I think the formula in table.CAPM should be this:

tracking.error = sqrt(sum((merged.assets[, 1] - merged.assets[, 
                2])^2)/(length(merged.assets[, 1]) - 1)) * sqrt(scale)

This result flows through to the Information Ratio as well.

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