Comments on: what is the definition of "tracking error" in Asset Management Field? http://computerassetmanagement.org/145/what-is-the-definition-of-tracking-error-in-asset-management-field/ Computer Asset Management Sat, 31 Jul 2010 10:35:59 -0500 http://wordpress.org/?v=2.8.4 hourly 1 By: Manuel Sarmiento http://computerassetmanagement.org/145/what-is-the-definition-of-tracking-error-in-asset-management-field/comment-page-1/#comment-190 Manuel Sarmiento Thu, 08 Oct 2009 13:39:59 +0000 http://computerassetmanagement.org/145/what-is-the-definition-of-tracking-error-in-asset-management-field/#comment-190 Tracking error is the standard deviation of the portfolio of differences: Let X be your portfolio; let B be the chosen benchmark. Then d=X-B is the portfolio of differences (which adds to zero) then TE=std(d) is the tracking error. If you have a covariance matrix S for your assets, then TE=((X-B)'S(X-B))^(1/2). Tracking error "interpretation" is the uncertainty of the excess returns (that is, of the return of the portfolio vs the benchmark's)<br><b>References : </b><br> Tracking error is the standard deviation of the portfolio of differences:
Let X be your portfolio; let B be the chosen benchmark.
Then d=X-B is the portfolio of differences (which adds to zero)
then TE=std(d) is the tracking error. If you have a covariance matrix S for your assets, then
TE=((X-B)’S(X-B))^(1/2).

Tracking error "interpretation" is the uncertainty of the excess returns (that is, of the return of the portfolio vs the benchmark’s)
References :

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