Active Risk Definition

CFA Level III Portfolio Management
#1

Can someone pls explain to me the following? I don’t get it

  • A portfolio with no net factor exposure will have active risk attributed entirely to Active Share

Why active risk attributable to active share is inversely proportional to the number of securities in the portfolio?

#2

If you’re not making factor bets then all of the active risk should be attributable to holding individuals securities in different weights or different from the benchmark - not risk from a sector focus, for example.

On # of stocks, as # increases then more likely holding more securities in the benchmark so lower active share and lower tracking error.