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InvestHub.com's
Finance Dictionary and Glossary of Investment Terms

tracking error  

Definition 1.

When using an indexing or any other benchmarking strategy, the amount by which the performance of the portfolio differed from that of the benchmark. In reality, no indexing strategy can perfectly match the performance of the index or benchmark, and the tracking error quantifies the degree to which the strategy differed from the index or benchmark.
 

Definition 2.

In an indexing strategy, the standard deviation of the difference between the performance of the benchmark and the replicating portfolio.
 

Definition 3.

A divergence between the price behavior of a position or portfolio and the price behavior of a benchmark. This often is in the context of a hedge that did not work as effectively as intended, instead creating an unexpected profit or loss.
 
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