Optimal level of active risk
I read few posts here and there about optimal level of active risk and i do not seem to understand with intuition and even by looking at the formula, what we are trying to say.
In the chapter related to optimal portfolio,it says that you have an optimal portfolio through the combination of a benchmark and actively managed portfolio. Following this definition, we have the optimal level of sharpe ratio which consists on getting the highest sharpe ratio, then we have the optimal level of portfolio risk which I think is about reducing the level of risk that the portfolio should take and then lastly, we have the optimal level of active risk which I am not sure how to make a connection. We know that the active risk is how much return you have taken more than the benchmark to generate extra return, but what does the below formula mean?
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