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Using 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.

Tracking Error

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.

See Also

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