Active risk is the chance that an investment will lose money, or underperform compared to its benchmark. Also known as “volatility” or “beta.” Many investors use active risk as a measure of how risky an investment is.
A higher active risk means a higher chance of losing money, but also a higher potential for returns. For example, a stock with a beta of 2.0 is twice as volatile as the market, and therefore has a higher active risk.
Active risk can be measured using standard deviation, which is a statistical measure of how much an investment’s return varies from its mean return. The higher the standard deviation, the higher the active risk.
Some investors prefer to use downside risk measures, such as value at risk (VaR) or drawdowns, to active risk. These measures focus on the potential losses from an investment, rather than the overall volatility.
Active risk is an important concept for investors to understand, as it can help them make informed decisions about where to allocate their assets. It is also a useful tool for asset managers to use when constructing portfolios and managing risk.