Active Risk

What is 'Active Risk'

Active risk is a type of risk that a fund or managed portfolio creates as it attempts to beat the returns of the benchmark against which it is compared. Risk characteristics of a fund versus its benchmark provide insight on a fund’s active risk.


Active risk is the risk a manager takes on in their efforts to outperform a benchmark and achieve higher returns for investors. Actively-managed funds will have risk characteristics that vary from their benchmark. Generally, passively-managed funds seek to have limited or no active risk in comparison to the benchmark they seek to replicate.

Active risk can be observed through comparison of multiple risk characteristics. Three of the best risk metrics for active risk comparisons include beta, standard deviation or volatility, and Sharpe Ratio. Beta represents a fund’s risk relative to its benchmark. A fund beta greater than one indicates higher risk while a fund beta below one indicates lower risk. Standard deviation or volatility expresses the variation of the underlying securities comprehensively. A fund volatility measure that is higher than the benchmark shows higher risk while a fund volatility below the benchmark shows lower risk. The Sharpe Ratio provides a measure for understanding the excess return as a function of the risk. A higher Sharpe Ratio means a fund is investing more efficiently by earning higher return per unit of risk. (See also: 5 Ways to Measure Mutual Fund Risk)

Active Risk Analysis

The Oppenheimer Global Opportunities Fund is an example of a fund that has been outperforming its benchmark with active risk. The Oppenheimer Global Opportunities Fund is an actively managed fund that seeks to invest in both U.S. and foreign stocks. It uses the MSCI All Country World Index as its benchmark. As of December 11, 2017 it has a one year return of 48.64% versus a return of 21.64% for the MSCI All Country World Index.

Its December 11 net asset value was $66.81. The Fund has a gross and net expense ratio of 1.17%.

Risk metrics for active risk comparison are below and are reported as of November 30, 2017.

Oppenheimer Global Opportunities Fund

Name 3 Year Beta 3 Year Standard Deviation 3 Year Sharpe Ratio
Oppenheimer Global Opportunities Fund 1.12 17.19 1.29
MSCI ACWI 1.00 10.59 0.78

The Fund's beta and standard deviation show the active risk added in comparison to the benchmark. The Sharpe Ratio shows that the Fund is generating higher excess return per unit of risk than the benchmark.