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Hi,
I've attached a backtest where I don't make any trades, and am wondering why tracking error and information ratio, are both non-zero. If I have not made any trades then I believe these values should both be zero as there has been no trading activity.
I assume what may be happening is that even though portfolio return may be zero, we're still able to calculate benchmark return, and consequently are still able to calculate both tracking error and information ratio.
I'm not sure if this is the intended behaviour, but would it be possible to clarify if I may be missing something?
Thanks!
Rahul Chowdhury
Hey Serena,
You're absolutely correct! Since the algorithm is not placing any trades, its returns over the backtesting period are 0%. While the benchmark produces non-zero returns over the same period. This is what produces non-zero the tracking error and IR.
Best
RahulÂ
Serena M McDonnell
Thanks for the clarification, Rahul! I was expecting that these values should be forced to be 0 if there are no trades, but this definitely makes sense as it follows the equation.
Serena M McDonnell
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