CFA CFA Level 2 Active risk vs Benchmark risk

Active risk vs Benchmark risk

  • This topic has 2 replies, 3 voices, and was last updated Jul-241:42 pm by milinda.
  • Author
    Posts
    • Avatar of delanitedelanite
      Participant
        • CAIA Charterholder
        Up
        0
        ::

        The equation you’ve presented, Var(Portfolio) = Var(active return) + Var(benchmark), is missing a critical term for portfolio variance calculation in CFA Level 2.

        The missing term accounts for the covariation between the active return and the benchmark return. This covariation reflects how the active return and the benchmark move together.

      • Avatar of dallasflynndallasflynn
        Participant
          • CFA Level 1
          Up
          0
          ::

          @shell shockers online The complete formula for the variance of a portfolio’s return is:

          𝑉
          𝑎
          𝑟
          (
          𝑃
          𝑜
          𝑟
          𝑡
          𝑓
          𝑜
          𝑙
          𝑖
          𝑜
          )
          =
          𝑉
          𝑎
          𝑟
          (
          𝑎
          𝑐
          𝑡
          𝑖
          𝑣
          𝑒
          𝑟
          𝑒
          𝑡
          𝑢
          𝑟
          𝑛
          )
          +
          𝑉
          𝑎
          𝑟
          (
          𝑏
          𝑒
          𝑛
          𝑐

          𝑚
          𝑎
          𝑟
          𝑘
          )

          2

          𝑊
          𝑒
          𝑖
          𝑔

          𝑡
          𝑝
          𝑜
          𝑟
          𝑡
          𝑓
          𝑜
          𝑙
          𝑖
          𝑜

          𝐶
          𝑜
          𝑣
          (
          𝑎
          𝑐
          𝑡
          𝑖
          𝑣
          𝑒
          𝑟
          𝑒
          𝑡
          𝑢
          𝑟
          𝑛
          ,
          𝑏
          𝑒
          𝑛
          𝑐

          𝑚
          𝑎
          𝑟
          𝑘
          )
          Var(Portfolio)=Var(activereturn)+Var(benchmark)−2∗Weight
          p

          ortfolio∗Cov(activereturn,benchmark)

      Viewing 1 reply thread
      • You must be logged in to reply to this topic.