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Research Insight - Different Ways to Measure Marginal Contribution to Risk - September 2013

In this Research Insight, we examine Marginal Contribution to Risk and define two alternative versions of this measure: Marginal Contribution to Active Risk (MCAR), and Marginal Contribution to Tracking Error (MCTE). Since most industry practitioners regard “active risk” and “tracking error” as synonymous, this nomenclature has sometimes generated confusion. In this paper, we explain the similarities and differences between MCAR and MCTE and offer insights from our research on how to apply these measures effectively.