Active factor risk calculation

CFA Level II Portfolio Management
#1

If we are give factor sensitivity of portfolio and benchmark, togather with factor variance, how do we arrive at active factor risk? It s not clear in the curric. Thanks.

#2

Anyone?

#3

(Portfolio - benchmark)*factor variance

isn’t it?

#4

ah i got it

you forgot to square the diff of active risk i.e. sens (port) - sens (benchmark)

it’s [sens port - sens benchmark) ^2 * factor variace

#5

The formula is: Active Factor Risk = (Active Sensitivity)^2 * Factor Variance.

(0.55-0.35)^2 * 296 = 11.84

#6

you beat me to the answer :slight_smile:

thanks !

#7

thanks guys now i’ll never forget it haha

#8

Excuse me, I can see the term, active factor risk, on page 426 of CFA Vol. 6. But where do you guys get that formula? Thanks.

#9

Read the example pg 431

#10

Thanks

#11

Question-

Active Factor Risk = (Active Sensitivity)^2 * Factor Variance. applies only when the covariance between the different factors is zero. Otherwise the active factor risk will need to cater to the caovariance terms as well…

SUM ((Beta differencial for factor 1)* (Beta differential for factor 2) * COV(Factor1, Factor2)) for all factors