Understanding Tracking Error in Passive Equity Investing

Passive equity investing aims to replicate the performance of a market index rather than attempting to outperform it. A critical measure in assessing the success of passive management is tracking error, which indicates how closely a portfolio's returns follow the returns of its benchmark index.

Explain the concept of tracking error in the context of passive equity investing. Please include its definition, how it is calculated, and its significance in evaluating a passive investment strategy.