Active Risk

CFA Level II
#1

Hi,

I’m trying to get a better understanding of Active Risk, I’ve seen it being asked a couple of time in the mocks. It’s used to calculate the Information Ratio as Active Risk / Active Return

Can someone please explain the components of Active Risk?..i.e Active Factor Risk and Active Specific Risk. The book is rather confusing…

Thanks

P

#2

I think from what I remember reading on this forum:

Active Factor Risk: The risk of differing in weight of sectors vs benchmark

Active Specific Risk: The risk of being overweight in a certain company, but not sectors vs benchmark

#3

So Active Risk is basically the systematic risk (measured by the beta) - diversifiable risk. Active specific risk is non-systematic risk. Something that you cannot diversify away. This is also idiosyncratic risk.

#4

Sorry - The first one is active factor risk

#5

Really I think you confused those two.

IMO, active factor risk represents systematic risk which cannot be diversified away, but active specific risk repserants non-systematic risk (conntected with a given company) which can be diversified away.

Someone?

#6

I would assume active specific risk could be diversified away of the two, because its excessive exposure to one stock instead of an index. But I don’t know for sure.

#7

I would highly recommend Elan’s PM video for this. The guy’s done a really good job on this. The only thing is it’s 4 hourslong (Basit Shajani) for the entire PM chapter and may not be worth yoru while at this stage.

#8

I saw Elan’s videos for the first time this year. I’m definetly using that to study moving forward, as I learn much easier watching someone and following along. The few videos I used this year helped a lot – but they are too long to watch at this point.

#9

The study guide’s pretty good on this too. Maybe get that? They sell individual chapters too.

#10

hehe i got 75% discout on elan on this video hehe

#11

nothing will replace the CFAI text!

#12

True this.

#13

I meant watching his videos and reading CFAI, not in place of. I use CFAI and then get videos to go over the material a second time after I finish reading everything.

#14

This stuff was painful to understand, especially FMCAR