Tracking error
Principles of Finance glossary · Principles Of Finance
Definition
The standard deviation of active return.
Tracking error in plain English
Imagine a fund manager who tries to beat a benchmark (say, the whole stock market). "Active return" is how much they beat or trail that benchmark by each period. Tracking error measures how BOUNCY that gap is — do they consistently land near the benchmark, or swing wildly above and below it? A high tracking error means the manager is placing big, unpredictable bets that stray far from the benchmark; a low one means they hug it closely. It's basically the "standard deviation" (a measure of how spread-out numbers are) of that beat-or-trail gap.
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