General Investment Information

What is a multi-factor model?

A multi-factor model is a statistical gadget that explains a broad collection of observations with a few key drivers.  For example, return to an enormous universe of stocks can be well explained with a market factor in combination with industry and style factors.

What is a risk model? Why Barra?

risk model is a multi-factor model that explains risk. At Aperio, we use the Barra model since it has a long track record, is industry-tested, and is intuitive.

What is the advantage of the Barra model versus others such as Fama French?

All factor models are not created equal. Rigorous testing and interpretability are just two of the many good reasons why Barra is the industry standard.

How does Aperio construct portfolios?

Aperio constructs portfolios using a transparent, time-honored method called mean-variance optimization. The idea is simple. Given an objective like tracking an index or emphasizing high-quality investments, mean-variance optimization identifies the portfolio with the lowest risk that is consistent with the goal. The method was proposed by Nobel Laureate Harry Markowitz in 1952, and it is one of the cornerstones of modern finance. Aperio’s implementation of mean-variance optimization is tuned to mitigate market frictions such as transaction costs, and to harvest losses that enhance after-tax returns.

What is tracking error?

Tracking error is a measure of divergence between a portfolio and its benchmark. When tracking error is small, the difference between portfolio return and benchmark return tends to be small. By definition, tracking error is the standard deviation of the difference between portfolio return and benchmark return.

Why should I care about tracking error?

Knowing a portfolio’s estimated tracking error allows an investor to assess by how much a portfolio will deviate from its benchmark. Sometimes investors focus on how closely a portfolio performs versus a benchmark, and for those situations tracking error can be a useful metric for measuring the impact of introducing tax-loss harvesting, environmental or social values, intentional factor bets like quality or minimum volatility, or a legacy portfolio’s likelihood to track a particular benchmark.

How will tracking error impact me?

Investors judge the success of some strategies based on how well a portfolio compares to a benchmark. For those who focus on comparative performance, forecasted tracking error tells us how closely a portfolio’s returns are likely to follow those of its benchmark.

All investments involve risk, including loss of principal invested. Past performance does not guarantee future performance. Individual client accounts may vary. The strategies and/or investments referenced may not be suitable for all investors as the appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Please refer to the "Disclosure" link below for additional information.