Portfolio vs benchmark deviation.

Tracking error measures how closely portfolio follows benchmark. 12% portfolio return vs 11% benchmark with 3% tracking error = 1% active return achieved with 3% deviation from benchmark. Information ratio = 1/3 = 0.33 (modest skill). Tracking error guides active vs passive style classification.

Example: portfolio returns 12%, benchmark returns 11%. Active return = 1%. Tracking error (standard deviation of monthly excess returns) = 3%. Information ratio = 1/3 = 0.33. Active management with modest skill. True passive funds: tracking error 0.1-0.5%. Smart beta: 1-3%. Active equity: 3-8%. Concentrated active: 8%+.

Tracking error guidance: under 1% = passive index fund. 1-3% = enhanced index (slight tilts). 3-6% = active management with diversification. 6%+ = high-conviction active. Higher tracking error = more chance of significantly beating or underperforming benchmark. Match tracking error to your tolerance for tracking risk - retirement accounts often prefer low tracking error, satellite holdings tolerate higher.

Run it with sensible defaults

Using portfolio return of 12%, benchmark return of 11%, std dev of excess returns of 3%, the calculation works out to 3.00%. Nudge the inputs toward your own situation and the output recalculates instantly. The defaults are meant as a starting point, not a recommendation.

The levers in this calculation

The inputs — Portfolio Return %, Benchmark Return %, and Std Dev of Excess Returns % — do not pull with equal force. Not every input has equal weight. Flip one at a time toward extreme values to feel which ones move the needle most for your situation.

How the math works

Tracking error = standard deviation of (portfolio - benchmark) returns. IR = active return / TE. The working is transparent — you can verify every step yourself in the formula section below. No black box, no opaque "proprietary model".

Why investors run this

Most people's intuition for compounding is wrong — not because the math is hard, but because linear thinking doesn't account for curves. Running numbers through a calculator like this one is the cheapest way to recalibrate that intuition before making an irreversible decision about contribution rate, asset mix, or retirement age.

What this doesn't capture

Steady-rate math ignores real-world volatility. Actual returns are lumpy; sequence-of-returns risk matters most in drawdown; fees and taxes drag on compound growth; and behaviour changes in drawdowns can reduce outcomes below the projection. Treat the number as one scenario, not a forecast.