what's return from active factor selection?

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singlesong80

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Anyone knows the formula of it?
This is inspired by question 59 choice C, from CFA Mock01.
 
Is there a formula? Active factor risk is just choosing which factors to have exposure to.
 
Given:
Active risk squared decomposition
Percent of total active risk in parenthesis
Portfolio Industry | Risk Indexes | Total factor | Active Specific | Active Risk Squared
S 10(28%) 12(33%) 22(61%) 14(39%) 36
T 2(5%) 26(65%) 28(70%) 12(30%) 40
Information ratio for S is 0.25 or T is 0.55
Choic C:
Portfolio T earned a higher return from active factor selection.
How to calculate this?
 
Hi Nibs,
there is a formula for active facotr risk.
AFR= (active sensitivity to the factor)^2 (factor variance)
Where, active sensitivity to the factor=portfolio sensitivity- benchmark sensitivity.
 
I only remember active risk squared = active risk + active specific risk
That’s a new one for me. I can’t even begin to understand what that table says.
 
Portfolio Industry | Risk Indexes | Total factor | Active Specific | Active Risk Squared
S 10(28%) 12(33%) 22(61%) 14(39%) 36
T 2(5%) 26(65%) 28(70%) 12(30%) 40
Information ratio for S is 0.25 or T is 0.55
Portfolio T has higher Information ratio(active return per unit of active risk) as compared to Portfolio S. Looking at the data it is due to Portfolio T higher total factor risk (70%) as compared to port S (61%)…active risk of both the portfolio is almost same (T 6.32 and S 6)
Therefore T has earned more active retrun by active factor selection (Risk Index 65%)
 
I got the same thing as Rakesh, but the answer is not C.
So C should be incorrect. Donnot know why.
 
answer is choice D
D Portfolio T was industry neutral compared to the benchmark portfolio.
The explanation is because T has a low sensitivity differential of 2, thus almost risk neutral.
It did not explain why C is incorrect, though it is the seemingly correct one to me.
 
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