Active Risk

Exploring Active Risk in Investment Management

Unraveling Active Risk

Understanding Active Risk

Active risk is the potential volatility a managed portfolio incurs in pursuit of outperforming its benchmark. It arises from deliberate investment decisions made by fund managers seeking to generate returns above market averages.

Analyzing Active Risk Metrics

Key Metrics for Active Risk Assessment

Assessing active risk involves analyzing metrics such as beta, standard deviation, and Sharpe Ratio. These indicators provide insights into a fund's risk profile relative to its benchmark, guiding investors in evaluating performance and risk management strategies.

Calculating Active Risk

Methodologies for Active Risk Measurement

Active risk can be calculated using two primary methodologies: subtracting benchmark returns from investment returns or computing the standard deviation of their differences over time. Both approaches offer valuable insights into the effectiveness of active management strategies.

Case Study: Oppenheimer Global Opportunities Fund

Illustrating Active Risk in Practice

The Oppenheimer Global Opportunities Fund serves as a compelling example of a fund that has historically surpassed its benchmark with active risk. By examining its performance metrics, investors can glean valuable insights into the dynamics of active management.

Distinguishing Active Risk vs. Residual Risk

Managing Different Types of Investment Risk

While active risk stems from deliberate portfolio management decisions, residual risk is inherent to individual companies and can be diversified away. Understanding the distinctions between these risks is crucial for crafting effective investment strategies.