---
title: "Tracking error"
description: "Tracking error is the volatility of the return differences between a strategy and its parent Combined — how far a member strategy strays from the whole."
canonical_url: "https://fincanva.com/docs/analysis/tracking-error"
last_updated: "2026-09-12"
md_url: "https://fincanva.com/docs/analysis/tracking-error.md"
---

# Tracking error

Tracking error is the volatility of the return differences between a strategy and the Combined it belongs to — the standard deviation, period over period, of how far the strategy's return strays from its parent Combined's return. It measures a strategy against its **parent Combined**, not against a benchmark: the common assumption that tracking error is always measured versus a benchmark does not apply here.

**Also seen as:** active risk, tracking risk

## How is tracking error calculated?

Tracking error is the standard deviation of the difference between the strategy's return and its parent Combined's return in each period. A strategy that moves almost in step with the whole produces small, steady differences; one that often diverges produces wide, variable differences. The daily return differences are annualised by multiplying by √252 (252 trading days a year), the same convention Fincanva uses for volatility and the Sharpe ratio.

$$
\text{Tracking error} = \operatorname{stddev}\big(r_{\text{strategy}} - r_{\text{parent}}\big) \times \sqrt{252}
$$

where $r_{\text{strategy}} - r_{\text{parent}}$ is the per-period gap between the strategy's return and the return of the Combined it sits inside, and the daily differences are annualised by ×√252.

## What counts as a high tracking error?

A low tracking error means the strategy moves closely in line with its parent Combined; a high tracking error means it diverges from the whole. Neither is inherently good or bad — the value tells you how much a given strategy pulls the Combined away from its own average path.

## Defaults in Fincanva

- Reported on the [Strategy analytics](/docs/analysis/strategy-analytics) page only, in its **Each strategy, against the Combined** card: one bar per strategy in the **Tracking error** column. A strategy analysed on its own still appears there, but it has no parent Combined to be measured against, so its tracking error carries no meaning — read it only for a strategy inside a Combined.
- Measured between a member strategy and its parent Combined — the strategy's return relative to the whole, **not** relative to a benchmark.
- Reported as the standard deviation of the daily return differences, annualised by ×√252 — the same convention as volatility and the Sharpe ratio.
- Pairs with the [information ratio](/docs/analysis/information-ratio), which divides a strategy's excess return over the Combined by this tracking error.

## Worked example

A Combined holds three strategies. Two of them tend to move closely with the Combined as a whole; the third often zigs when the Combined zags. Month to month, the third strategy's return differs from the Combined's by a wide, shifting margin, while the first two barely differ at all. The standard deviation of those monthly differences — much larger for the third strategy — is its tracking error. A high tracking error flags the strategy that pulls the Combined around the most, independent of whether that strategy made or lost money.

*These figures describe what a strategy would have done on historical data, not what it will do, and a tracking error is not a limit on how far a strategy can diverge in future. Fincanva provides no financial advice — see [Is this financial advice?](/docs/investing-theory/is-this-financial-advice).*