Recruiter's Glossary

Examples: Attribution Analysis • Risk Budget • Portfolio Characteristics

Tracking Error

Term from Portfolio Analysis industry explained for recruiters

Tracking Error is a way to measure how closely an investment portfolio follows its target benchmark (like the S&P 500). Think of it like comparing a copy to the original - the fewer differences, the better. Investment managers use this to show clients how well they're matching their promised investment strategy. For example, if a fund claims to follow the S&P 500, a low tracking error means it's doing a good job of matching that index. It's sometimes also called "active risk" or "tracking risk" because it shows how much risk comes from making choices different from the benchmark.

Examples in Resumes

Reduced Tracking Error from 4% to 1.5% through improved portfolio rebalancing strategies

Monitored and analyzed Tracking Risk for $2B worth of index funds

Developed reports to track Active Risk across multiple institutional portfolios

Typical job title: "Portfolio Managers"

Also try searching for:

Portfolio Analyst Investment Analyst Quantitative Analyst Risk Manager Portfolio Manager Investment Manager Index Fund Manager

Where to Find Portfolio Managers

Professional Organizations

Online Communities

Job Boards

Example Interview Questions

Senior Level Questions

Q: How would you explain to a client why their portfolio has a higher tracking error than expected?

Expected Answer: A senior manager should discuss how to communicate complex portfolio differences in simple terms, explain market conditions that may have caused the deviation, and present a clear plan for addressing the issue.

Q: How do you balance minimizing tracking error with achieving higher returns?

Expected Answer: Should demonstrate understanding of risk-return tradeoffs, explain strategies for making controlled active bets while maintaining overall index alignment, and discuss how to justify these decisions to stakeholders.

Mid Level Questions

Q: What factors can cause tracking error to increase?

Expected Answer: Should mention factors like trading costs, cash holdings, dividend reinvestment timing, index changes, and market volatility, with practical examples of how to manage these.

Q: How do you monitor and report tracking error?

Expected Answer: Should explain the regular monitoring process, key reporting metrics, tools used, and how to present this information to different audiences (management, clients, team members).

Junior Level Questions

Q: What is tracking error and why is it important?

Expected Answer: Should explain tracking error as a measure of how closely a portfolio follows its benchmark, and why this matters for index funds and active management.

Q: How is tracking error calculated?

Expected Answer: Should demonstrate basic understanding of tracking error calculation as the standard deviation of difference between portfolio and benchmark returns over time.