For BB2 the active share for manager A and manager B is the same but manager A has a lower active risk then manager B.
What could drive this?
The solution says that Manager B’s active risk is driven by decisions at the Sector level rather than the security level.
I’m confused here. My thinking is if decisions are at the sector level and we’re using different sectors (more diverisifed) than the active risk will be lower. I would think Manager B’s decisions are not at the sector level but at the security level.
Thanks
So the thing is that at security level, ideally stocks within the same sector would have high correlations and almost the same risk. Due to this, my active risk would pretty much be the same assuming I invest in the same sectors but different stocks within the sector.
On the other hand, if I choose to invest in sector A and the benchmark is invested in sector B, the active risk would be high given the different risks of each sector.
I was looking at this as well. Friend was asking me. Happy to be done this exam.
And thanks everyone.
I got stuck on the idea that different sectors means lower correlation but it’s actually talking about investing in a sector DIFFERENT than the benchmark which leads to higher active risk. That makes sense.
So on page 463 (bottom), when they discuss cross correlation – I’m assuming all the stocks are in the benchmark and we’re changing weights only. So there was bank/bank pair and bank/tech pair. The bank/tech pair will have lower correlation leading to potential lower active risk right? Do I have that correct?
Thanks again
Never mind that part it’s the same idea. You’re confusing it.