The critical variable in the determination of the success of the active portfolio is

Question

Quizplus · Accepted Answer

The critical variable in the determination of the success of the active portfolio is alpha, which represents the excess return of the portfolio compared to its benchmark. Alpha can be decomposed into two parts: systematic risk and nonsystematic risk. Systematic risk (i.e., beta) is the risk that cannot be diversified away and affects the entire market, while nonsystematic risk (i.e., idiosyncratic risk) is the risk that is unique to a particular company or sector and can be diversified away. Therefore, the best choice is B, which represents alpha/nonsystematic risk.

The Critical Variable in the Determination of the Success of the Active