Understanding Tracking Error in Passive Equity Investing

In the realm of passive equity investing, tracking error plays a crucial role in assessing how closely a portfolio mimics the performance of its benchmark index. Tracking error is defined as the standard deviation of the difference between the returns of the portfolio and the returns of the benchmark index over a specified period.

Consider the following statements regarding tracking error:

1. A low tracking error implies that the portfolio consistently produces returns that are very close to the benchmark.

2. Higher tracking error indicates greater risks in achieving returns that deviate from the benchmark.

Based on this understanding, answer the following question: