Financial Education

Depending on the portfolio management approach, equity portfolios face two general types of risk (each of which can have several subcategories): active risk and tracking risk.

Active risk relates to the performance of the selected securities relative to the benchmark portfolio. Portfolio stocks performing worse than the average stock in the index would be a form of active risk.

Tracking risk results when the benchmark portfolio has substantially different return patterns. The chosen benchmark should generally perform similarly to the managed portfolio. If a portfolio is consistently up when the benchmark is down it may be because the chosen benchmark does not represent the management style. The portfolio would be said to have a large tracking error relative to the benchmark, and therefore may mean that the manager is not investing in the types of securities he or she was hired to manage.

For more information, see all articles on: Investing in Stocks, Portfolio Management, Security Selection

See also:

Investment Risk Management Process

Enterprise Risk Management

The Role of Capital Market Expectations in the Portfolio Management Process

The Role of Private Equity Investments in a Portfolio

Risk Governance