True Active Risk = [Trueactive risk ^2 - misfit active risk ^2]^.5

Active Return = Mgr - BM

Misfit Return = BM - I.BM

How do you calculate true active risk and misfit risk (vs the returns for each)?

Thanks.

True Active Risk = [Trueactive risk ^2 - misfit active risk ^2]^.5

Active Return = Mgr - BM

Misfit Return = BM - I.BM

How do you calculate true active risk and misfit risk (vs the returns for each)?

Thanks.

same way you would calculate any type of variance.

variance is the average of the squared deviation from the mean.

It’s the same as the standard deviation of returns.

I dnt think we’ll be asked to calculate the Misfit risk from a set of returns. They could ask us ‘what is the true active return’ based upon misfit, managers bench and investors bench.