CFA Level I · CFA Level I Exam · Benchmarking Returns
An analyst computes a portfolio's active return by subtracting the benchmark return from the portfolio return. The result is most likely a measure of:
Active return measures the portfolio's performance relative to its benchmark. It is the simple difference between the two returns. Tracking error is different because it is the standard deviation of active returns across periods, and total risk is measured by return volatility.
- Athe portfolio's total risk
- Bthe portfolio's tracking error
- Cthe portfolio's performance relative to its benchmarkCorrect
Explanation
Active return is the difference between portfolio and benchmark returns, so it measures relative performance. Tracking error is the standard deviation of active returns over time, not a single difference. It says nothing about total risk.
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