Cash has higher active risk because it has a low correlation with the equity benchmark - did not understand this. Can someone pls help?

Cash is literally riskless. If you add cash to a passively managed equity portfolio, you’re basically modifying the risk of the portfolio to a to a mix of risky and riskless investments, relative to the benchmark (assuming no cash in benchmark portfolio) and hence increases active risk.

active risk = difference in risk level between your portfolio and the benchmark. Now think about that in relation to what saurabh said above

Yes, understood now :slight_smile: Thanks to both of you…