l (20.70) "=1 where <(^1)ACTE^ o*(*) represents the relative marginal contribution to tracking error (RCTE). RCTE measures the relative change in tracking error given the relative change in active weights. Mathematically, RCTE is defined RCTE = 3'W/'W dwa{t-l)lwa{t-l) <{t-\) o*(f) da* {t) du,'(t-l) (2071;   oa(t) ■xACTE(t) As (20.71) shows, RCTE measures the relative change in tracking error given a relative change in weight. Hot spot reports (Litterman 1996) are based off of the RCTE calculation. Let's consider a numerical example. Suppose that an asset's active weight in a portfolio is 50 basis points and that the current predicted tracking error (annualized) is 3.5 percent. Assuming an absolute marginal contribution to tracking error of 8 percent would imply that the relative contribution to tracking error for this asset is 1.1428 percent. RCTE00 = ^^xO.O8 = 0.011428 (20.72) "* 0.035 The RCTE for the nth asset, interpreted as 1.143 percent of the portfolio's risk budget, is consumed by this asset. Alternatively, if we focus on the ACTE, we find that if we increase our position in this asset by 200 bps (i.e., from 0.50 percent to 2.50 percent), then the tracking error increases by 16 bps. A similar decrease in the position would lead to a decrease in tracking error. A key distinction between ACTE and RCTE lies in the way a change in position is defined. Suppose the current active weight in a position is -0.5 percent (an underweight). An increase in this weight, from a RCTE perspective, would mean making this weight more negative (e.g., going from-0.5 percent to-1.0 percent). In