How do I calculate tracking error for my investment portfolio?
An example of an AI chatbot conversation about tracking error calculation for investment portfolios.
How do I calculate tracking error for my investment portfolio?
To calculate tracking error, you need the returns of your portfolio and the benchmark. Do you have those figures?
Yes, my portfolio returned 8% and the benchmark returned 10% over the last year.
Great! First, calculate the difference in returns for each period. Then, find the standard deviation of those differences.
What if I have monthly returns instead of annual?
You can still calculate tracking error using monthly returns. Just ensure you compute the differences and standard deviation based on the same frequency.
Can you give me an example with numbers?
Sure! If your monthly returns are 0.5%, 0.6%, and 0.4% for your portfolio, and the benchmark returns are 0.7%, 0.8%, and 0.6%, calculate the differences and then find the standard deviation of those differences.
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