Tracking error is defined as...

Tracking error refers to the standard deviation of a portfolio's active return, which is a measure of how consistently a portfolio's returns deviate from the returns of its benchmark. Active return is calculated as the difference between the portfolio's return and the benchmark's return.

Understanding tracking error is crucial for portfolio managers and investors, as it helps assess the risk associated with a portfolio's strategy relative to its benchmark. A higher tracking error indicates greater variability in the active return, which can suggest either a more aggressive investment style or simply a lack of alignment with the benchmark.

Other definitions provided in the choices do not accurately represent tracking error. While the difference between a portfolio's return and its benchmark is related to active return, it does not encapsulate the statistical aspect of measuring risk, which is what tracking error specifically quantifies. The total expense ratio is unrelated to tracking error, as it refers to the costs associated with managing a fund. Lastly, the variance of the active weights in the portfolio pertains to a different aspect of portfolio management and risk assessment and does not define tracking error.