Question

Over the past 6 months, you observe the following monthly returns for an actively managed small cap mutual fund and for the benchmark small cap index:

Time     Fund return (%) Index return (%)

1            2.79       2.3

2            1.06       1.24

3            -2.36     -2.71

4            0.18       0.66

5            -0.26     -0.7

6            2.95       2.25

What is the tracking error for the fund over this period?

PLEASE DO THE PROBLEM ON EXCEL AND SHOW THE STEPS.

The answer should be :

0.45 margin of error +/- 0.01.

Answer 1

Let Fund Return = Rf

Let Index Return = Ri

Tracking Error = Standard Deviation of (Rf - Ri)

Hence, tracking error = 0.45