Active investing involves managing assets in a portfolio to enhance its value, but requires managers to accept additional risk. Identifying asset risk involves establishing a benchmark for performance and making decisions based on unusual events.
An asset risk is the amount of volatility associated with a specific portfolio or fund, as the investment attempts to exceed the amount of return identified as a benchmark for that asset. The idea is that to achieve this goal, the fund or portfolio manager must voluntarily take on risk beyond the risk required to simply match the benchmark. When considering any type of investment activity as a means of exceeding benchmark returns, the manager must also consider the amount of active risk that he or she is assuming on behalf of the portfolio or fund.
The concept of active risk is closely associated with active investing. This investment approach is simply the process of closely managing the assets within a portfolio and taking aggressive and timely steps to enhance the value of that portfolio. Active investing is different from passive investing in that the passive approach requires the acquisition of investments that are expected to consistently generate a decent amount of return, making close management of those assets unnecessary.
Since the goal of active investing is to aggressively manage assets and increase the value of securities held in a portfolio or fund, the process requires managers to be willing to accept additional risk. To achieve this goal, managers must take a close look at the risk-return trade-off, determining whether the degree of risk involved in acquiring a given asset is worth the amount of return that asset ultimately generates. If the manager determines that a particular security carries a high degree of risk with a mediocre potential return, he is likely to avoid that particular investment. At the same time, if an option carries a higher level of risk but also has the potential to generate significant returns, the manager may consider the degree of active risk within reason and take steps to purchase that option.
Identifying the asset risk associated with any investment requires establishing what the investor considers a benchmark for the performance of that asset. The process also requires decisions to be made that are not necessarily based on projections of overall market movement. Often asset risk is present when a manager has reason to believe that a given asset will outperform similar assets in the market due to some type of unusual event occurring in the near term. By timing the purchase of those assets so that they are available just before the anticipated events, the manager can generate a greater amount of return as long as those events continue to impact the value of those assets. The manager further enhances returns by pinpointing when to sell those assets and avoiding any losses that may occur when prices begin to settle into a pattern that is more in line with the current market trend.
Smart Asset.
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