Groundlearn / Glossary / Tracking error
Tracking error
Also called active risk. A CFA term, defined in plain English with the distinction examiners test.
What it means
The standard deviation of the difference between portfolio and benchmark returns.
The exam angle
A mandate constraint as much as a statistic. A tight tracking error budget limits how much a manager can differ from the index at all.
Where it appears in the syllabus
- Performance MeasurementCFA Level III · exam weight 5–10% · Attribution, appraisal, manager selection and the GIPS standards.
- Portfolio ConstructionCFA Level III · exam weight 15–20% · Equity and fixed-income portfolios, alternatives, institutions, trading costs.
Related terms
- AlphaReturn in excess of what the asset’s risk exposures would predict.
- CompositeAll portfolios managed to the same strategy or objective, grouped together for GIPS reporting.
- GIPSVoluntary standards for calculating and presenting investment performance, designed so that a prospective client can…
- Implementation shortfallThe difference between the return on a paper portfolio and the return actually achieved, capturing delay, market…
- Information ratioActive return divided by tracking error — value added per unit of benchmark-relative risk.
- Money-weighted returnThe IRR of a portfolio including the timing and size of every contribution and withdrawal.
Educational content only. This is not financial, investment, legal or regulatory advice. Check the official curriculum for your own exam before relying on any definition here.
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