CFA Level I · CFA Level I Exam · Benchmarking Returns
An analyst computes a portfolio's active return each month relative to its benchmark and finds the average is positive. Which statement about the active return is most accurate?
Active return compares the portfolio's return with the benchmark's return, measuring the difference arising from the manager's decisions. It is not the excess return over the risk-free rate, and it is not beta times the market return, which relates to systematic risk exposure.
- AIt measures the portfolio's return relative to the risk-free rate.
- BIt shows the manager's returns relative to the benchmark's returns.Correct
- CIt equals the portfolio's beta multiplied by the market return.
Explanation
Active return is the portfolio's return minus the benchmark's return, so it shows relative performance against the benchmark. Return relative to the risk-free rate is excess return. Beta times market return is a CAPM component, not active return.
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