Active factor tilt, what is it?

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Pauluss

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Hi guys,
Hope your reviews or last SS studies are going well…
I’ll need your help because I’m stuck with my poor english knowledge.
In a schweser sentence, is it written: “Active risk is determined by the manager’s active factor tilt & active asset selection decision.”
What does “active factor tilt” mean? what is it? How ca we define it?
Or what is the translation in another language?
I’ll really appreciate your help & good luck to everyone on this board.
Paul
 
I don’t think this is well explained either, but here is my take:
Active Factor Tilt - Think of this as a sector or industry bet relative to the market index/benchmark. Like you overweight technology and underweight financials for example.
Active Asset Tilt - same concept but with specific securities, so within the financials sector you (again relative to the benchmark!) overweight Wells Fargo and underweight AIG.
 
Active factor tilt is the alpha on the active factor, so if I have a portfolio that is 75% SPY and 25% active equity selections, these selections and how they outperform the index will determine his performance.
 
Active risk Sqaured is the sum of Active Factor Risk and Active Specific Risk.
I like to think of an example to illustrate this:
Assume you have a portfolio of 2 stocks, ABC and XYZ, benchmarked to the S&P 500. These 2 stocks are affected by a number of different factors (i.e - oil price changes, inflation, growth assumptions, etc.)
When the factors change (i.e - oil prices go up, or growth goes down), the sensitivities of stocks XYZ and ABC may be affected by it. We call this Active Factor Risk.
Active Specific Risk has to do with the particular stocks you have picked to be in your portfolio (in this case, ABC and XYZ). Their subsequent performance and volatility directly affects your portfolio.
So to generalize, when you are a portfolio manager, and you have a number of stocks in your portfolio that are exposed to various factors, macro or micro-economic, you have 2 types of risks to look out for:
1. what happens to my portfolio’s sensitivity when these factors go up/down? (active factor)
2. what happens to my portfolio if I make changes to the individual stocks in my portfolio? (active specific)
 
Ah, good point gents. Factor risk will of course entail the relative overweight/underweight of the relative to the particular benchmark.
 
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