Can someone explain this to me? Schweser’s explanation has left me with a few questions.
Does this have to do with modeling?
Misfit risk comes from having a benchmark that isn’t appropriate for the manager’s style. Not sure how to calc or if we need to, but it’s an input in the total active risk, which is used in the info ratio.
normal return less benchmark return, correct?
Misfit Risk is the difference between: Manager’s custom benchmark - Market benchmark (like an index)
That makes sense. I think Krochelli is saying the same thing. The managers “normal” portfolio should be the optimum custom benchmark.
Bill is a PM for Ted Bill’s investment style is small cap growth When evaluating Bill’s performance Ted uses the Dow. In June 1999 a small cap growth benchmark increased by 25% In June 1999 a Bill’s portfolio increased by 20% In June 1999 a the Dow increased by 5% In this example the misfit return is 20% - 5% = 15%… I think.
Excellent!
Bankin’ Wrote: ------------------------------------------------------- > Bill is a PM for Ted > Bill’s investment style is small cap growth > When evaluating Bill’s performance Ted uses the > Dow. > > In June 1999 a small cap growth benchmark > increased by 25% > In June 1999 a Bill’s portfolio increased by 20% > In June 1999 a the Dow increased by 5% > > In this example the misfit return is 20% - 5% = > 15%… I think. Upon reviewing the secret sauce I think the above example is incorrect. Here are the formulas in the SS True Active Return = Total Active Return - Normal Portfolio Return Misfit Active Return = Normal Portfolio Return - Investor’s Benchmark. So for the above example Misfit Active Return: 25% - 5% = 20% and True Active Return: 20% - 25% = (5%) I apologize for the misinformation.