# Reading 32 - Problem 11 A - Misfit risk

The solution in CFAI text (page 285) indicates that the long short mgr would be benchmarked to the russell 1000 rather than the mgr’s normal BM. Isn’t Russell 1000 the Mgr’s BM?

I love that misfit risk, it sounds wild

I don’t have the question in front of me, but don’t get confused (like I do) between the manager’s normal benchmark and the investor’s benchmark.

onelasttime Wrote: ------------------------------------------------------- > The solution in CFAI text (page 285) indicates > that the long short mgr would be benchmarked to > the russell 1000 rather than the mgr’s normal BM. > Isn’t Russell 1000 the Mgr’s BM? I believed you are right…this is how I understand it: The “investors benchmark” seems to the portfolio benchmark (Russell 3000 in this case). The “true active risk” is 6% -> Measured against the normal benchmark (Russell 1000) The “misfit active risk” is 0.1% -> Difference due to the return being measured against the investor benchmark (portfolio benchmark in this case…apparently). Total active risk = true active risk + misfit active risk = 6.0% + 0.1%

I agree with you all. I believe it’s a typo of “long short mgr would be benchmarked to the russell 3000 rather than the mgr’s normal BM”. Need the confirmation, though. (Total active risk)^2 = (true active risk)^2 + (misfit active risk) ^2 I have a question on 11.E. The answer[p285] says that the exposure to non-US equities in the long-short portfolio should not concern Whimore as long as she believes that the manager has skill in managing non-US equities. I think those “non-US equities” are “non-US companies”(such as BP and SAP) which are in Russell 1000. The question states that “… 20% of the active return generated comes from equity positions in non-US companies.” Please correct me if I’m wrong.

Just look at Russell 1000…BP and SAP are not in it.

Russell has a strict US company requirement . BP = British and SAP = German

Then, in Q11.E, why it’s not a concern if the manager invest 20% in non-US equities? The ceoverage ratio is low, so the benchmark quality is low?