The tracking error of an optimized portfolio can be expressed in terms of the ____________ of the portfolio, and thus reveals ____________.
A)return; portfolio performance
B)total risk; portfolio performance
C)beta; portfolio performance
D)beta; benchmark risk

Question

Quizplus · Accepted Answer

The tracking error of an optimized portfolio can be expressed in terms of the beta of the portfolio, and thus reveals the benchmark risk of the portfolio. Therefore, option D is the correct answer. Choice A is incorrect because the tracking error is not an indicator of portfolio performance but rather a measure of how closely the portfolio follows a benchmark. Choice B is also incorrect because total risk refers to the overall risk of the portfolio, whereas the tracking error specifically measures the deviation from the benchmark. Choice C is partially correct because beta is a measure of systematic risk, but it is not a measure of portfolio performance, which is what the question is asking for.

The Tracking Error of an Optimized Portfolio Can Be Expressed