A note on the estimation of minimum tracking error portfolios

Abstract

Minimum tracking error portfolios are often implemented by portfolio managers in order to track the performance of a benchmark asset in terms of risk and return. This note provides an analytical derivation of the minimum tracking error portfolios of excess returns on a benchmark by relying on the regression-based approach to portfolio weights proposed in Kempf and Memmel (2006). This approach allows estimating the weights of the minimum tracking error portfolios by means of a simple OLS regression.