PT - JOURNAL ARTICLE AU - Raman Vardharaj AU - Frank J. Fabozzi AU - Frank J. Jones TI - Determinants of Tracking Error for Equity Portfolios AID - 10.3905/joi.2004.412305 DP - 2004 May 31 TA - The Journal of Investing PG - 37--47 VI - 13 IP - 2 4099 - https://pm-research.com/content/13/2/37.short 4100 - https://pm-research.com/content/13/2/37.full AB - The theoretical and empirical literature in finance has focused primarily on the standard deviation of return as the appropriate measure of risk. Yet for asset managers whose benchmark is a market index, the more appropriate measure is tracking error (the standard deviation of the difference in the portfolio's returns and the benchmark's returns). For an asset manager, the risk of significantly underperforming the benchmark rises as the tracking error increases. Thus tracking error is an important indicator of portfolio performance and should be monitored frequently. The determinants of tracking error for equity portfolios include number of stocks in the portfolio, portfolio market capitalization and style difference relative to the benchmark, sector deviation from the benchmark, benchmark volatility, and portfolio beta.