Tracking Error

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DEFINITION of 'Tracking Error'

A divergence between the price behavior of a position or a portfolio and the price behavior of a benchmark. This is often in the context of a hedge or mutual fund that did not work as effectively as intended, creating an unexpected profit or loss instead.

BREAKING DOWN 'Tracking Error'

Tracking errors are reported as a "standard deviation percentage" difference. This measure reports the difference between the return an investor receives and that of the benchmark he or she was attempting to imitate.

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RELATED FAQS
  1. How can I calculate the tracking error of an ETF or indexed mutual fund?

    Calculate the tracking error of an indexed exchange-trade fund (ETF) or mutual fund by doing a standard deviation percentage ... Read Full Answer >>
  2. Is tracking error a significant measure for determining ex-post risk?

    Before we answer your question, let's first define tracking error and ex-post risk. Tracking error refers to the amount by ... Read Full Answer >>
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