Concept Review: More Risk Averse To Active Risk Than Total Risk

#1. To believe that a positive active return is possible, the investor would have to be confident they could select the manager that offers the highest active return. #2. Managers are often times measured against some passive benchmark. Because they believe it’s difficult to beat a passive benchmark/index, they won’t stray too far from the benchmark. Commonly referred in our industry to (Closet Indexing). #3. If the investor wants the highest active return, they would have to invest more money with the active manager who has the highest active return thereby resulting in less diversification. For all these reasons, investors are more risk averse when it comes to active risk than Total Risk.