What is the difference between the two?
Active Risk = St Dev(Rp - Rb)
Residual Risk = St Dev(Rp - Rb)
?
bump
According to the def (p. 374), residual risk is the portion of the active risk that cannot be attributed to the systematic (beta) risk of the portfolio.
okay, so is it correct to say that total risk = active risk + residual risk?
what doesn’t make sense is how these two entirely different ideas have the same formula? Additionally, both of these terms are used to calculate the IR?
Active risk= residual risk= tracking risk= tracking error= standard deviation of the difference between your return and the return of a benchmark you’re following= the standard deviation of active return
this is the denominator in the IR formula to standardise active return
The above terms are used interchangeably in the curriculum