Kapie

stingreye wrote:
Quick calc to prove:
active risk is a standard deviation so:
Mgr 1 Risk = 2%
Mgr 2 Risk = 1.5%
50/50 weight
so
[.5^2*.02^2+.5^2*.015^2]^1/2 = 1.25%
You can take out Manager 1 and risk actually increases becuase active risk is uncorrellated.
Your updated equation would be [.5^2*.00^2+.5^2*.015^2]^1/2 = [.5^2*.015^2]^1/2 = .75% so the active management did decrease.