Question

All else equal, the tracking error of an active fund would be expected to be _________ the tracking error of a passive fund:

Select one:

a. Lower than

b. Unable to be determined from the information provided

c. Equal to

d. Higher than

e. Theoretically equal to

Answer 1

An active fund is actively managed and changes are continuously made to ensure the fund does better than the benchmarked index. In the case of a passive fund, there is no active changes made to the fund and it generally tracks the benchmarked index or fund.

Tracking error is the deviation of the returns of the fund from the returns of the benchmarked index or fund.

From the above two explainations we can see that the tracking error in an active fund is expected to be higher than that of a passive fund.

Thus,

Answer - d.Higher than

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