Value and Capital Management: A Handbook for the Finance and Risk Functions of Financial Institutions

Glossary

Absolute Tracking Error (ATE) –

defined as the difference between the actual investment portfolio returns and the returns on the benchmark portfolio (e.g., $\text{AT}{\mathrm{E}}_t=\left(R_t-R_t^B\right)$). A passive investment approach seeks to minimize the tracking error whereas an active approach may generate large tracking errors over time. Various statistics can be calculated based on the tracking error. For example, the average ATE over a long time horizon ($\phi \text{AT}{\mathrm{E}}_t=\frac{1}{T}\sum _{t=1}^T\text{AT}{\mathrm{E}}_t$) gives an indication of average “alpha” or outperformance relative to the benchmark. Some define tracking error as the standard deviation of the absolute tracking error (e.g., $\text{TE}=\sqrt{\frac{1}{T}\sum _{t=1}^T{\left(\text{AT}{\mathrm{E}}_t-\phi \text{AT}{\mathrm{E}}_t\right)}^2}$). $\text{TE}\le 0.5\%$ generally represents an index fund, where small tracking errors can arise due to the desire to limit transaction costs from directly matching the benchmark.

Accumulation Phase –

defined as the period of time when an annuity investor is in the early stages of building up the cash value of the annuity.

Acquisition Expense Ratio –

the ratio of acquisition expenses to the premium earned.

Acquisition Expenses –

the direct and indirect costs of selling, underwriting and initiating a product or service. Acquisition expenses include sales commissions and sales staff expenses (salaries, facilities and equipment costs), advertising and underwriting expenses (including appraisals, contract issuance expenses).

Active Limit Breach –

occurs when a limit is exceeded because of a conscious decision by an individual. Most breaches are ...