The critical variable in the determination of the success of the active portfolio is
A) alpha/systematic risk.
B) alpha/nonsystematic risk.
C) gamma/systematic risk.
D) gamma/nonsystematic risk.

Question

Quizplus · Accepted Answer

Alpha/nonsystematic risk is the correct answer because alpha represents the active return on an investment compared to a market index or benchmark, which is essentially the value added or subtracted by a portfolio manager's investment decisions. Nonsystematic risk, also known as idiosyncratic or specific risk, is the portion of risk that is unique to a particular company or industry and can be diversified away. Therefore, the critical variable in determining the success of an active portfolio is the manager's ability to generate alpha while managing nonsystematic risk through diversification.

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