Meaning
Active risk refers to the risk an investment manager takes by deviating from a benchmark index in hopes of outperforming it. It’s the variability of a portfolio’s returns relative to its benchmark.Definition
Active risk quantifies the additional volatility or deviation of a portfolio’s returns compared to a chosen benchmark. It reflects the manager’s active decisions rather than market movements.Measurement
It is typically measured by the standard deviation of the difference between the portfolio’s returns and the benchmark’s returns. This is also known as tracking error.Purpose
Understanding active risk helps investors assess how much a manager’s specific investment decisions contribute to performance variations. It guides decisions on strategy and manager selection.Author
