What is tracking error in finance?
An example of an AI chatbot conversation about tracking error and benchmarks in finance.
What is tracking error in finance?
Tracking error measures how closely a portfolio follows its benchmark index. It's the standard deviation of the difference between the portfolio's returns and the benchmark's returns.
Why is tracking error important for investors?
Tracking error is important because it helps investors understand the risk of deviating from the benchmark. A high tracking error indicates more volatility compared to the benchmark.
How can I reduce tracking error in my portfolio?
To reduce tracking error, you can adjust your asset allocation to more closely match the benchmark, use index funds, or regularly rebalance your portfolio.
What is an acceptable level of tracking error?
An acceptable level of tracking error varies by investment strategy, but generally, a lower tracking error is preferred for passive strategies, while active strategies may have higher acceptable levels.
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