# 2009 Mock Q 23 - Active Risk

True Active Return = Total Active Return - Norman Portfolio Return so why they have taken the wrong formula. I mean they have calculated it like Total Active Return - Investor Benchmark Return which is a formula of misfit risk. Anyone?

Anyone?

I just did this problem as welll… this is definitely wrong on CFAI part… just a complete error… has anyone else confirmed this?

the only possible thing i could think of here is in the question it says Total Active return… the true active return is manager return - normal port… I have seen no mention of a Total Active return, only a Total Active Risk, which is True + Misfit, so maybe Total Active Return is True REturn + Misfit… this seems like a dirty trick question though by CFAI in the wording… typical of them to come up with garbage like this…

It was my understanding that they calculated Total Active Return as True Active Return + Misfit Active Return

cfaboston28 Wrote: ------------------------------------------------------- > True Active Return = Total Active Return - Norman > Portfolio Return so why they have taken the wrong > formula. I mean they have calculated it like Total > Active Return - Investor Benchmark Return which is > a formula of misfit risk. > > Anyone? Where did you find it ?

I am sorry, I now know that you mean in 2009 Mock Q 23.

i think by total active return, they are actually referring to managers return that is due to active management and includes both true and misfit components. true active return = mgr active return - normal benchmark return misfit active return = normal benchmark return - investor’s bechmark

funny, just searched on 09 mock, as I just finished it and this is the 3rd question I got wrong that is debatable.

cfaboston28 Wrote: ------------------------------------------------------- > True Active Return = Total Active Return - Norman > Portfolio Return so why they have taken the wrong > formula. I mean they have calculated it like Total > Active Return - Investor Benchmark Return which is > a formula of misfit risk. > > Anyone? The question says that Total Active Return must be over 2.1 and Total Active Risk must be below 1.8. It’s not asking for “True” active return but Total Active Return, which is the manager’s alpha to the investor benchmark - meaning that if you returned 150% and the SP500 5% then your active return was 145%, regardless of your own benchmark. As far Q.25 asking for “True Active Risk”, that is just (Total Active Risk^2 - Misfit Active Risk^2)^1/2; which makes sense since this is the risk that is not attributable to any benchmarking.

My answer key for the portfolio active risk part of the question is 1.60%. I keep getting 1.71%. Anyone else notice this too? I don’t believe this was discussed on this thread yet.

I believe they miscalculated it - sure seems to be 1.71% based on their calculation. As for the active risk thing, I didn’t recall all the CFA stuff, and I just went with what the real world uses, which is portfolio minus benchmark.

thanks alot. recalculated it at least 10 times and thought i was going crazy.

level3aspirant Wrote: ------------------------------------------------------- > i think by total active return, they are actually > referring to managers return that is due to active > management and includes both true and misfit > components. > > true active return = mgr active return - normal > benchmark return > misfit active return = normal benchmark return - > investor’s bechmark This is exactly what they are asking, Total active return is broken into two parts, true and misfit. Just like total active risk is broken into true and misfit. then you get the true information ratio true informaiton ratio = true active return/true active risk