Can someone help me out with Active factor risk and active specific risk. I am not able to understand it fully.
Active Risk, or tracking error, is the std. dev. of the active return (which also happens to be our denominator in our Information Ratio)…
an example of Active Factor Risk would be where a Portfolio Manager decided to overweight a certain Industry, let’s say Airlines, relative to the benchmark. Because the PM is more heavily weighted in this industry, his factor sensitivity will change – he’s now more sensitive to oil shocks because of this.
an example of Active Specific Risk would be where a Portfolio Manager shares identical factor sensitives, but instead chooses specific stocks to overweight or underweight. Let’s stick with our Airlines example. The PM may still match the benchmark weight for airlines, but may overweight Delta and underweight JetBlue. They still share the same factor sensitives, but he has now inherited some specific risk w/ regards to Detla.