CFA Practice Question

There are 119 practice questions for this study session.

CFA Practice Question

The risk from active asset selection attributable to deviations of the portfolio's individual asset weightings versus the benchmark's individual asset weightings, after controlling for differences in the factor sensitivities of the portfolio versus the benchmark, is known as ______.
A. active factor risk
B. active specific risk
C. tracking risk
Explanation: Active risk is the standard deviation of active returns. Active risk is also called tracking error or tracking risk. Active risk squared can be decomposed as the sum of active factor risk and active specific risk.

Active factor risk = risk from active factor tilts attributable to deviations of the portfolio's factor sensitivities vs. the benchmark's.

Active specific risk = risk from asset selection attributable to deviations of the portfolio's individual asset weights vs. benchmarks.

User Contributed Comments 6

User Comment
murli Adding the assets with lower correlation will reduce the risk of portfolio.
chuong Lower coeffiriennt correlation -> lower covariance - > lower Portfolio variance
Criticull it's not negative, but something is better than nothing.
jpducros Can someone explain with its own word the Active Factor Risk and Active Specific Risk ? Is seems for me that the question here describes exactly these 2 risks. The sum of the 2 being the tracking risk, I answered C.
thanhb91 Active factor risk: the active risk of favoring one factor in excess of benchmark
Active specific risk: the active risk of asset allocation, which is the difference between porfolio asset weight and benchmark weight
jimmyvo What to focus on are the first six words of the sentence: "The risk from active asset selection." Immediately, you should know that it's active specific risk. The remainder of sentence is to confuse you.
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