Tracking error is one of the most crucial metrics for evaluating a portfolio’s performance and a portfolio manager’s potential for outperforming the market or a benchmark. This article will show how to calculate the tracking error in Excel.

## What Is Tracking Error?

The difference between the return variations of an investment portfolio and the return fluctuations of a selected benchmark is measured by tracking error, a financial performance indicator. Standard deviations are used to calculate the return fluctuations.

## How to Calculate Tracking Error in Excel: with Detailed Steps

In this article, we will determine parameters such as Active Return and Squared Active Return to calculate the tracking error in Excel. So, to know all the parameters related to this article for calculating the tracking error in Excel, you can follow the below steps accordingly.

### Step 1: Make a Dataset with Proper Parameters

Here, we will create our sample dataset with multiple parameters related to tracking error calculation.

- In order to calculate tracking errors, we will make a dataset.

### Step 2: Determine Active Return

Now, we will determine the active return from the difference between portfolio return and S & P 400 return.

- Firstly, select cell
.*F5* - Secondly, write down the following formula.

`=D5-E5`

- Then, press
**Enter**and use the**Fill Handle**to drag rightward to the remaining cells to see the result.

**Read More: **How to Convert Percentage to Basis Points in Excel

### Step 3: Evaluate Squared Active Return

In this section, we will demonstrate how to determine the squared active return by squaring the active return.

- Firstly, select
**Cell**.*F5* - Then, write down the following formula.

`=F5^2`

- After that, press
**Enter**and use the**Fill Handle**to drag rightward to the remaining cells to see the result.

**Read More: **How to Calculate Profitability Index in ExcelÂ

### Step 4: Calculate Tracking Error in Excel

In this last section, we will calculate tracking errors in Excel by determining the necessary parameters involving tracking errors.

- Firstly, choose cell
.*C14* - Then, type the following formula to find the sum of all squared active returns.

`=SUM(G5:G12)`

- After that, hit
**Enter**.

- So, you will see the sum of all squares.
- Again, select cell
.*C15* - Then, type the following formula.

`=C14/7`

- After wad, press
**Enter**.

- Now, you will get the output.
- Besides, write down the following formula in cell C16 to determine the monthly standard deviation.

`=SQRT(C15)`

- Now, hit
**Enter**.

- Therefore, you will the monthly standard deviation.
- Similarly, type the formula to calculate the tracking error in cell
.*C17*

`=C16*SQRT(12)`

- Then, press
**Enter**.

- Finally, you will see the final result of the annual tracking error here in the below image.

**Read More: **How to Use Macaulay Duration Formula in Excel

**Download Practice Workbook**

You may download the following Excel workbook for better understanding and practice it by yourself.

## Conclusion

In this article, we’ve covered step-by-step procedures to calculate the tracking error in Excel. We sincerely hope you enjoyed and learned a lot from this article. Additionally, If you have any questions, comments, or recommendations, kindly leave them in the comment section below.

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