Active Factor and Active Specific Risk

CFA Level II
#1

Hi folks, I don’t understand the Schweser description of Active Factor and Active Specific Risk - can somebody kindly explain in idiot terms? Many thanks! David

#2

Active Risk is made up of two components: Factor risk - which is related to sensitivities to factors compared to benchmark Specific risk - related to weights used by you v/s weights in Benchmark If you have high factor risk and low specific risk then you are mostly an average risk manager because you are going along with mkt sensitivities if you play around with the weights of stocks v/s benchmark then you have higher specific risk remember active risk = factor + specific if your factor and specific risk is 50/50 you are indexing the benchmark for e.g. SPDR etc if you are screwing around with weights also called index tiltiing then you are bigger risk taker hope this helps

#3

chowder Wrote: ------------------------------------------------------- > Active Risk is made up of two components: > > Factor risk - which is related to sensitivities to > factors compared to benchmark > Specific risk - related to weights used by you v/s > weights in Benchmark > > If you have high factor risk and low specific risk > then you are mostly an average risk manager > because you are going along with mkt > sensitivities > > if you play around with the weights of stocks v/s > benchmark then you have higher specific risk > > remember > > active risk = factor + specific > if your factor and specific risk is 50/50 you are > indexing the benchmark for e.g. SPDR etc > if you are screwing around with weights also > called index tiltiing then you are bigger risk > taker > > hope this helps ( active risk ) ^2 = active factor risk + active specific risk

#4

thx sidd-- vortiem - cfai mock has one problem related to this - if you review it - you are in good shape

#5

ta!