Active Risk

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Active Risk

Active Risk

The risk a portfolio or fund acquires when it is actively managed, especially when its money managers attempt to outperform some benchmark. That is, the more a fund or portfolio differs from the benchmark upon which it is based, the more likely it is to underperform or outperform that same benchmark. This extra risk is active risk.
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One way to think about active risks is to group them into "top down" and "bottom up" categories.
Once the insurer determines that it is willing to take active risk (deviate from the benchmark), it should determine how much active risk it is willing to take.
It is the active manager's job to consistently generate returns above the benchmark by taking active risk.
An example of a risk budget that could be employed in an insurance company portfolio is shown in "Using Active Risk Most Efficiently" above.
What is active risk? First, active risk is taking portfolio positions that are different from the benchmark.
Information ratio is often described as a measure of manager skill-the higher the ratio, the more efficiently the manager has utilized the active risks it takes in managing the portfolio.
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