Active risk

A fund or managed portfolio may take on active risk when it makes an effort to outperform the benchmark against which it is measured. A fund’s active risk can be determined by comparing the risk characteristics of the fund to its benchmark.

By contrasting various risk characteristics, active risk can be shown. Beta, standard deviation or volatility, and Sharpe Ratio are three of the strongest risk indicators for active risk comparisons.

Active risk, a statistical term, is the standard deviation of active returns.

The formula for calculating active risk is:-

Active risk =Sd (Rp-Rb)

Where, Sd refers to the standard deviation, Rp is the returns on the portfolio, Rb is the returns on the benchmark.