Tracking Error
Introduction
Given an asset or portfolio of assets and a benchmark, the relative
standard deviation of returns between the asset or portfolio of assets
and the benchmark is called tracking error.
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Tracking Error Example
The function inforatio computes tracking
error and returns it as a second argument
load FundMarketCash
Returns = tick2ret(TestData);
Benchmark = Returns(:,2);
[InfoRatio, TrackingError] = inforatio(Returns, Benchmark)
which gives the following results:
InfoRatio =
0.0432 NaN -0.0315
TrackingError =
0.0187 0 0.0390
Tracking error is a useful measure of performance relative to
a benchmark since it is in units of asset returns. For example, the
tracking error of 1.87% for the fund relative to the market in this
example is reasonable for an actively managed, large-cap value fund.
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 | Using the Information Ratio | | Risk-Adjusted Return |  |
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