Active return
The portfolio's return minus the benchmark's return. In a factor model it splits into a part from active factor exposures and a part from security selection.
Where you will meet it
Active return appears in 12 learning outcomes on the CFA syllabus. A few of them:
- Explain how the value that active management adds is gauged
“For a multi-asset fund it splits into asset allocation, each asset class's active weight times the benchmark return for that class, and security selection, each class's portfolio weight times the active return earned within the class.”
- Explain why an investor might choose each approach along the range from passive to highly active equity management
“At the passive end, the case rests on market efficiency, low fees, low turnover, tax efficiency and the arithmetic that average active return before costs is zero.”
- Separate the part of investment results due to the asset owner's decisions from the part due to the manager, and interpret each
“Macro attribution peels the total fund return into layers: the return of the policy portfolio, the effect of the owner's deviations from policy weights and benchmark choices, and the managers' combined active return.”
- Work out the information ratio on both an ex post and an ex ante basis, explain what it means, and contrast it with the Sharpe ratio
“The information ratio divides active return by active risk.”
Practise it
Practise active return until it is automatic: questions that explain every wrong option.
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