Active Risk

Posted in Finance, Accounting and Economics Terms, Total Reads: 1661

Definition: Active Risk

Also known as Tracking Error of an Active Portfolio.

As a portfolio manager tries to beat the benchmark at which it is being compared, there is some amount of risk that is undertaken; this risk is referred to as Active Risk. It is termed active, since the manager actively attempts to deviate from the market movement.

Passive managers are the ones who replicate the index as closely as possible; however active managers try to beat the index by timing the stock decisions, changing the asset weights in the portfolio, etc.

Active Risk may be calculated as a difference between portfolio returns and index returns or as a standard deviation of the difference in portfolio and index returns over time.

Where RP = Portfolio Return

RB = Benchmark Return

N = number of periods considered for tracking.

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