What is the right formula for misfit active return?
is it portfolio return - benchmark return or is it the normal benchmark- return on the overall benchmark?
In one oof the mocks, they say that misfit active return is the normal benchmark- return on the overall benchmark? but when I think of the definition of active return, then this formula is not correct.
The misfit return is the difference between the active return of a benchmarked portfolio that fits manager’s style and mandate and the active return of the portfolio relative to a ill-chosen benchmark.
Misfit active return is another name for style active return.
Suppose that the benchmark for the overall portfolio is the S&P 500, and that the benchmark for the small-cap subportfolio manager is the Russell 2000. Then the misfit active return for that manager is the Russell 2000 return less the S&P 500 return.