Can anyone explain this one to me. It says: The table of Active Risk Squared Decomposition % of total active risk in Parenthesis Portfolio Industry Risk Factors Total Factor Active Specific Active Risk Squared S 10 (28%) 12 (33%) 22 (61%) 14 (39%) 36 T 2 (5%) 26 (65%) 28 (70%) 12 (30%) 40 That tracking risk is the square root of active risk squared. I thought tracking risk is equal to active risk and Active risk squared is equal to active risk + active specific risk. Thus if active specific risk is equal to 14 and active risk squared is equal 36, then isn’t it that active risk should equal 22?
check out page 405 in the CFAi books for an example…
Thank you
I got messed up on this question too.
I got is right b/c I remembered (as you said) that tracking risk is equal to active risk. So if i take the square root of “active risk squared” I am left with active risk (tracking risk). This was actaully very simplistic and I think thats what hung a lot of people up