Tracking Error
How much the portfolio deviates from the benchmark.
Tracking error is the standard deviation of the difference between portfolio and benchmark returns (active returns). It measures the consistency of active management. Low tracking error means the portfolio closely follows the benchmark; high tracking error indicates significant deviation. Often expressed as an annualized percentage.
Formula
Related Terms
Portfolio Alpha (Jensen's)
Excess return after adjusting for market risk — the holy grail of active management.
Information Ratio
Alpha per unit of active risk — how consistently you beat the benchmark.
Portfolio Volatility
Standard deviation of portfolio returns — total risk including diversification effects.