True active return / misfit active return

CFA Level III
#1

I just want to verify that I have this correct. True active return = Rp - Normal Portfolio Misfit active return = Normal Portfolio - Incorrect Benchmark Is this right? Thanks

#2

That’s correct even though I would not use incorrect benchmark term. Just benchmark or market benchmark.

#3

GO maratikus!

#4

I would go further and call it “investor’s benchmark” Can I get a “go Smarshy”?

#5

Go Smarshy! Literally. Leave this place. (kidding)

#6

Go Smarshy! But don’t leave.

#7

Thanks maratikus. Black Swan, you hurt my feelings. I’ll cut you.

#8

aww i love the familiarity of these names!

#9

Smarshy Wrote: ------------------------------------------------------- > Black Swan, you hurt my feelings. I’ll cut you. Next on the list is CFAI looking to cut your feelings. Maratikus their was a question on Market Segmentation which you so generously gave full answer. Just wanted to thank you for that because I forgot the other time.

#10

A good application of this is a big pension fund. Say you have a fund with a policy weight of 40% towards US Stock, and you fund ten managers within this asset class. One of them may specialize in large cap financials, so even though the overall benchmark for this asset class might be the Russell 1000, a much more appropriate benchmark for that particular manager would be a sector-specific index like the NYSE financial index. So the “true” active return for that manger would be his actual return - NYSE financial index, and then the misfit active return would be the NYSE financial index - Russell 1000. It also helps to keep in mind that the “misfit” return has nothing to do with the managers actual performance, but rather the purview in which she picks stocks. that’s why, as maratikus says, saying “incorrect” benchmark isn’t really what it is, it’s more like the difference between what that manager specializes in and the broad index assigned to that asset class. I think using the word “misfit” is clumsy and not sure why it’s the convention. IMO it’s more accurate to say something like “specialization differential” or something to that effect.