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Tracking Error Calculator

Enter portfolio and benchmark returns to get tracking error, average active return and information ratio — how tightly you hug the index.

Portfolio returns (%)

Benchmark returns (%)

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How it works

Active return = portfolio − benchmark · Tracking error = standard deviation of active returns · Information ratio = mean active return ÷ tracking error

Tracking error is the standard deviation of the difference between a portfolio’s returns and its benchmark’s — a measure of how much the portfolio strays from the index it is compared against. Index funds aim for near-zero tracking error, while active managers accept higher tracking error in pursuit of outperformance. The information ratio then judges whether that wandering paid off, dividing the average outperformance by the tracking error to show return earned per unit of active risk.

Worked example

Portfolio returns of 8, 12, −3, 5, 10 against benchmark returns of 7, 10, −2, 6, 9 give active returns of 1, 2, −1, −1, 1, averaging 0.4%. The sample standard deviation of those differences is about 1.34%, so tracking error is 1.34% and the information ratio is 0.4 ÷ 1.34 ≈ 0.30.

Frequently asked questions

What is a good tracking error?

It depends on the goal. A passive index fund wants tracking error near zero — often under 0.1% — to mirror its benchmark. An active fund might run 4–8%, which is fine if the extra return justifies the extra deviation.

What does the information ratio tell me?

It measures outperformance per unit of active risk: average active return divided by tracking error. A higher ratio means the manager added more return for the amount they strayed from the benchmark; ratios above about 0.5 are considered good.

Is high tracking error bad?

Not inherently. For an index fund it signals poor replication, but for an active strategy it simply reflects bold positioning. What matters is whether the active return earned is worth the added deviation — which is exactly what the information ratio captures.

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Educational estimate, not investment advice. Trading involves risk of loss.