CoachPassive management aims at a tracking error of zero: the manager holds the benchmark and is paid a few basis points for doing it cheaply. Active management accepts a tracking error in the hope of a positive mean active return.
Examples
Example 3.7 (Twenty overweight bets)
A manager overweights 20 stocks by 1% each and underweights 20 others by 1% each. If stock-specific returns are independent with volatility 25% and the common factors cancel, . A mandate that caps the tracking error at 3% leaves room for little more than this: an “active” portfolio is mostly the index.