Plz explain Factors marginal contribution to active risk square- Reading 54 on page no 429?
Somebody help 
Confusing. I hope its not asked!
Active factor risk is the part of active risk explained by the portfolio active factor exposures. Active specific risk is the active risk which is not explained by the portfolio active factor exposures and it is summation of active weight of individual asset multiplied by the residual active risk of that asset (residual risk is the risk which is not explained by the factors). Try to think it like a multiple linear regression which we studied in QM. There we studied about SST, RSS and SSE. SST = RSS + SSE. SSE was the residual error which was unexplained by the regression analysis. Similarly, here we can think of RSS as active factor risk, SSE as active specific risk and SST as active risk squared. Now suppose we have 3 factors to explain the active risk squared: P/E, dividend yield, and earning growth. Suppose that the individual active factors risk for P/E, dividend yield, and earning growth are 10, 12 and 18 respectively and the active specific risk (unexplained by those 3 factors) is 40. Then, we have active squared risk = 10+12+18+40 = 80. Marginal contribution of P/E to active squared risk = (10/80)*100 = 12.5%. Similarly, the marginal contributions of factor dividend yield and factor earning growth are 15.0% and 22.5% respectively. Once you get the active factor risk the its is very easy to calculate the factor’s marginal contribution to active risk squared.