Answer: standard deviation of the differences between a portfolio's return and its benchmark return.

## Explanation **Correct Answer: A** Tracking error is a key concept in active portfolio management that measures how closely a portfolio follows its benchmark. **Definition:** Tracking error = Standard deviation of (Portfolio Return - Benchmark Return) **Why the other options are incorrect:** **Option B**: This describes the variance of active returns, not tracking error. Tracking error is the standard deviation, not the square of standard deviation. **Option C**: This describes the difference in volatility between portfolio and benchmark, which is different from tracking error. Tracking error specifically measures the variability of the difference in returns, not the difference in their volatilities. **Key Points:** - Tracking error measures the consistency of active management - Lower tracking error means the portfolio closely tracks the benchmark - Higher tracking error indicates more active management and potential for greater deviation from the benchmark

Author: LeetQuiz Editorial Team