Tracking Error can be calculated Either by running an OLS regression of a fund/portfolio against its benchmark OR by calculating the standard deviation of the difference in returns between the Fund/portfolio and its Benchmark. Tracking Error calculated by running an OLS regression of the fund/portfolio against its benchmark will be a _____________ value than when calculated using the standard deviation of the difference in returns between a fund/portfolio and its benchmark, because ___________________________.

1. same; tracking error is generated by creating the portfolio different from the benchmark and has no relevance on the methodology of calculation

2. lower; OLS regressions minimise the sum or square of errors.

3. lower; OLS regressions adjusts for the degrees of observations

4. higher; OLS regression adjusts for the beta

5. same or higher; OLS regressions are affected by multi-collinearity