Module 47.3 LOS 47.e: Components of Active Risk and Active return

Active return is the difference in returns between a managed portfolio and its benchmark:

Active return = R_P – R_B

Active risk (also known as tracking error or tracking risk) is the standard deviation of the active return:

Active risk = tracking error = σ_(RP – R_B)

Information Ratio

The higher the IR, the more active return the manager earned per unit of active risk.

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