Tracking Error
TOPIC: TRACKING ERROR Financial ratios are used to evaluate and analyze financial data in order for companies and individual investors to understand and gain a better perspective of available information. ... Any deviation from the benchmark is called “tracking error. ... You run into tracking error risk when investing in index funds. Tracking error measures how an index fund has performed versus the benchmark. ... ” Tracking error is usually reported as a “standard deviation percentage” difference. Basically tracking error tells you the difference between the return received and that of the benchmark it was compared to. Tracking error is calculated by first calculating the difference between returns on the benchmark and the index fund.# The tracking error is equal to the standard deviation of this difference. Therefore tracking error is the fluctuation in the degree of difference in returns between the index fund and its benchmark.