Hi there,
If ‘active factor risk’ is stated as '“This is systematic risk attributable to differences in factor exposures between the portfolio and the benchmark." Is it correct? I thought active risks have nothing to do with systematic, so I thought this statement was wrong.
This appeared in 2013 mock and the answer says it’s correct.
If someone could explain why it’s ‘systematic’, that will be great. Thanks.
The formula for active risk squared is = s^2(Rp-Rb). Or you can separate into active factor risk and active specific risk. I thought of this as basically the sum of (systematic risk + nonsystematic risk). Nonsystematic = specific risk.
There’s a footnote that says “active” means “different from the benchmark”.
Active factor risk focuses on factor beta differences “b” eg overweight technology sector
Active specific risk focuses on differences in asset weights “w” eg overweight a particular stock in technology sector.
hope this helps…
Thanks for both of you!