Tracking Error

The tracking error is defined as the standard deviation of the difference between the return of the portfolio and the return of a given benchmark.

The tracking error enables to check if the portfolio’s variations are similar to a benchmark’s ones (the portfolio or index you want to replicate). The higher the tracking error, the worst the portfolio replicates the benchmark, and vice versa.

It is a pertinent risk measure for portfolios built with a benchmarked allocation strategy.