Variance minimization approach to tracking
An approach to bond indexing that uses historical data to estimate the variance of the tracking error. |
Similar financial terms
Variance-Covariance matrixThe variance-covariance matrix shows the variances and covariances between a number of different market variables.
Variance rule
Specifies the permitted minimum or maximum quantity of securities that can be delivered to satisfy a TBA trade. For Ginnie Mae, Fannie Mae, and Feddie Mac pass-through securities, the accepted variance is plus or minus 2.499999 percent per million of the par value of the TBA quantity.
Serial covariance
The covariance between a variable and the lagged value of the variable. In econometrics referred to as autocovariance.
Portfolio variance
Weighted sum of the covariance and variances of the assets in a portfolio.
Minimum-variance portfolio
The portfolio of risky assets with lowest variance.
Minimum-variance frontier
Graph of the lowest possible portfolio variance that is attainable for a given portfolio expected return.
Mean-variance criterion
The selection of portfolios based on the means and variances of their returns. The choice of the higher expected return portfolio for a given level of variance or the lower variance portfolio for a given expected return.
Mean-variance analysis
Evaluation of risky prospects based on the expected value and variance of possible outcomes.
Covariance
A statistical measure of the degree to which random variables move together.
Stratified sampling approach to indexing
An approach in which the index is divided into cells, each representing a different characteristic of the index, such as duration or maturity.
Signaling approach
Approach to the determination of the optimal capital structure asserting that insiders in a firm have information that the market does not have; therefore, the choice of capital structure by insiders can signal information to outsiders and change the value of the firm. This theory is also called the asymmetric information approach.
Risk premium approach
The most common approach for tactical asset allocation to determine the relative valuation of asset classes based on expected returns.
Residual dividend approach
An approach that suggests that a firm pay dividends if and only if acceptable investment opportunities for those funds are currently unavailable.
Optimization approach to indexing
An approach to indexing which seeks to optimize some objective, such as to maximize the portfolio yield, to maximize convexity, or to maximize expected total returns.
Cross-sectional approach
A statistical methodology applied to a set of firms at a particular point in time.
Tracking error
In an indexing strategy, the difference between the performance of the benchmark and the replicating portfolio.
