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#Error calculation fityk how to#
Here we discuss how to calculate tracking error for the portfolio along with examples and a downloadable excel template. This has been a guide to Tracking Error Formula. It also helps the investors to find out whether the charges are high enough for the fund to impact the return of the fund. It showcases whether the fund manager is trying to actively track the benchmark or he is putting his style in order to modify it. It helps the investors of a fund to understand whether the fund is closely tracking and replicating the components of the index it is putting up as a benchmark. In this case, the tracking errors for the portfolio will be 1.5%. The first method is to simply make the difference between the portfolio return and the return from the index it is trying to replicate. There are two formulas to calculate the tracking error for a portfolio. There are several mutual funds where the fund managers of that fund aim to construct the fund by closely replicating the stocks of a particular index, by trying to add stocks in his fund with the same proportion. Tracking error is simply a measure to gauge how much the return of a portfolio or a mutual fund deviates from the return of an index it is trying to replicate in terms of the components of an index and also in the term of the return of that index. Tracking Error Formula is used in order to measure the divergence arising between the price behavior of portfolio and price behavior of the respective benchmark and according to the formula Tracking Error calculation is done by calculating the standard deviation of the difference in return of the portfolio and the benchmark over the period of time.
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