U W 1.0% 2.0% Downside Red Zone (475 bps) Downside Yellow Zone (550 bps)   1991 2000 2001 2002 0.0% FIGURE 15.1 Rolling 60-Day Tracking Error (Annualized) International Manager O rolling 24- and 36-month with monthly performance data). The tracking error of a manager can be computed as:3 O, =   n t=l n 2 (i5.i; where n = Number of observations V = Return of the portfolio at time t = Return of the benchmark at time t Once the rolling analysis (Figure 15.1) has been completed, we can draw conclusions from the data with the use of simple statistics. By calculating the mean of our rolling tracking error analysis, we can see that on average our international manager has achieved 700 basis points of tracking error over the respective benchmark prior to hiring. We should reasonably expect that future tracking error observations should fall somewhere near the mean. By plotting the rolling analysis, we can graphically see our manager's historical "risk footprint." The graphical analysis should serve as the basis for discussing tracking error expectations with managers. One of the most difficult questions that arises when attempting to set a range of 3There are other measures of tracking error, such as residual tracking error, which aims at removing directional or beta biases embedded in a manager's return series.