tracking error

Tracking Error

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

Notes:

Tracking errors are reported as a "standard deviation percentage" difference. Basically, it tells you the difference between the return you received and that of the benchmark you were trying to copy.

See also: Benchmark, Hedge, Standard Deviation

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Tracking error

In an indexing strategy, the standard deviation of the difference between the performance of the benchmark and the replicating portfolio.

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tracking error

The difference in the return earned by a portfolio and the return earned by the benchmark against which the portfolio is constructed. For example, if a bond portfolio earns a return of 5.15% during a period when the portfolio's benchmark (say, for example, the Lehman Brothers Index) produces a return of 5.06%, the tracking error is .09%, or 9 basis points.