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Intermediate
Active return is the positive or negative result of a portfolio return minus its benchmark return over a specified period of time. For example, if a fund's total return was 9% and the benchmark return was 8%, then the active return for that period was +1%. Unlike the term alpha, active return does not take risk into consideration.
Synonym: relative return
For context, obtaining active returns for an active portfolio manager or active product is often the first step in a comprehensive performance study to see if the manager benefited from luck or skill. Many novice investors get enamoured with a manager's active returns without going the next step to analyze risk.
Kay: Shoot me now. Ken says we need training
on the difference between active return and alpha.
Ann: Gladly. And, what's wrong with that?
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False, the calculation requires simple subtraction.
True. Often novice investors miss difference between these terms.
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