Tracking Error

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What is a 'Tracking Error'

A tracking error is the 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?

    Understand what tracking error is and learn about the significant difference it can represent for investors who favor index ... Read 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 Answer >>
  3. How is the standard error used in trading?

    Understand how the standard error is used in statistics and what it measures. Learn how the standard error is used in trading ... Read Answer >>
  4. What is standard deviation used for in mutual funds?

    See how standard deviation is helpful in evaluating a mutual fund's performance. Use it in combination with other measurements ... Read Answer >>
  5. What happens if you don't hedge your investments?

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