Understanding Tracking Error in Passive Equity Investing

Very Easy Passive Equity Investing Tracking Error

In the context of passive equity investing, a fund replicates the performance of a benchmark index by holding the same stocks in the same proportions. However, it may still experience variations from the index due to several factors. This variation is known as tracking error.

Which of the following best describes tracking error in a passive equity investment?

The difference between the return of a fund and the return of its benchmark index.

The total return earned by a fund over a specific period.

The outperformance of a fund relative to a market average.

Hint

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