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active risk square and TB model

in TB model, the denometer is active risk square or active specific risk?

as I know total risk=factor risk+specific risk, so TB model only meausres system risk? how about unsystematic risk?

OK , understood , thanks

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janaka -- beta is needed to use CAPM to calculate required return for the stocks
then expected return - required return = alpha...

CP

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How is a stock weight decided for the active portfolio?

I thought that only alpha and Unsystematic risk were needed.

Right answer is alpha , beta and unsystematic risk are needed.

I haven't yet figured out why you need beta , though

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is specific risk(numerator) under TB model a unsystem risk? is this specific risk same as the specific risk under active risk square=factor risk +specific risk? what's the relation ship between factor variance and factor rik?

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The Tb model is a small actively selected portfolio combined with a market portfolio. say like 95% Portfolio 5% selection. So you're hoping to make a gain off of that 5% to beat the market . The formula with unsystematic risk is how to weight to an active portfolio of 2 shares. The one with larger unsystematic risk has a smaller weighting.

the denominator in the information ratio is active risk

Active risk squared is equal to active factor risk and active specific risk

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There are 2 kinds of information ratio, ex-post and ex-ante ratio. The ex-post ratio has active risk as its denominator and measures the excess return over the prior period. The ex-ante ratio is used together with the TB model and uses unsystematic risk as its denominator. It measures the expected excess returns that you are forecasting to generate using the active portfolio.

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I believe the denominator is Unsystematic risk squared.

Your talking about denominator of the information ratio for evaluating tracking portfolios. Two different things

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so TB model consider unsystem risk, how about system risk, is it diversified? I don't believe so

informational ratio talking about active risk not active risk square

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