Skip to content

NISM Certifications · NISM-Series-VIII: Equity Derivatives · Understanding Index

Tracking error of an index fund relative to its benchmark index is best described as:

Tracking error is the standard deviation of the difference between the fund's returns and the benchmark index's returns. It shows how consistently a fund or portfolio follows its index, with a lower value indicating closer replication of the index.

  1. AThe standard deviation of the difference between fund returns and index returnsCorrect
  2. BThe average return of the index over a year
  3. CThe difference between the index's opening and closing values
  4. DThe total expense ratio charged to investors

Explanation

Tracking error measures how closely a portfolio follows its index, computed as the standard deviation of the return differences. It is not the index return, a daily range, or the expense ratio, although expenses can contribute to it.

Did you get it right without looking?

One question tells you little. A timed set on Understanding Index shows your real accuracy, how long you take and where you lose marks.

Practise Understanding IndexFree diagnostic mock

More Understanding Index questions