HI guys, I just read this sentence in Book 4 Page 488: Because his primary emphasis is on long-term exposure to risk factors, he would hold a highly diversified portfolio to minimize idiosyncratic risk. As a multi-factor manager running a diversified portfolio, his active risk should be relatively low.
I have 2 questions:
- Whats the connection between factor-based approach and diversified portfolio? Does that mean a factor-based portfolio is well-diversified?
- How does “a diversified portfolio” relate to “low active risk”?
Active risk means security selection ability, and thus active management. If active risk is low, it means the manager just follow the index.
Please correct me if Im wrong. Thanks.