Tracking Error
Tracking error is a measure of the volatility of returns on an investment relative to a benchmark index. It is used to measure the performance of an investment portfolio relative to a benchmark index or a chosen benchmark. Tracking error is also known as active risk, and is a measure of the risk of an investment relative to a benchmark. It is calculated by taking the standard deviation of the difference between the portfolio and the benchmark over a given period of time.
History of Tracking Error
Tracking error has been used as a measure of performance since the early days of portfolio management. It was first used in the 1950s by Harry Markowitz, who developed the concept of modern portfolio theory. Markowitz used tracking error to measure the risk of a portfolio relative to a benchmark. Since then, tracking error has become an important measure of performance for portfolio managers and investors.
Tracking error is also used to measure the performance of an actively managed portfolio relative to a benchmark. Active management involves making decisions about which investments to buy and sell in order to achieve a desired return. Tracking error is used to measure the risk of an actively managed portfolio relative to a benchmark.
Table of Comparisons
| Portfolio | Benchmark | Tracking Error |
|---|---|---|
| 10% | 12% | 2% |
| 15% | 18% | 3% |
| 20% | 22% | 2% |
Summary
Tracking error is a measure of the volatility of returns on an investment relative to a benchmark index. It is used to measure the performance of an investment portfolio relative to a benchmark index or a chosen benchmark. Tracking error is also known as active risk, and is a measure of the risk of an investment relative to a benchmark. It is calculated by taking the standard deviation of the difference between the portfolio and the benchmark over a given period of time. For more information about tracking error, you can visit websites such as Investopedia, Morningstar, and Bloomberg.
See Also
- Alpha
- Beta
- Sharpe Ratio
- Standard Deviation
- Risk-Adjusted Return
- Volatility
- Active Risk
- Portfolio Risk
- Portfolio Management
- Modern Portfolio Theory
