In finance, active return refers to the returns produced by an investment portfolio due to active management decisions made by the portfolio manager that cannot be explained by the portfolio's exposure to returns or to risks in the portfolio's investment benchmark; active return is usually the objective of active management and subject of performance attribution.
Passive returns can be obtained deliberately through passive tracking of the portfolio benchmark or obtained inadvertently through an investment process unrelated to tracking the index.
[2] Benchmark portfolios are often represented in theoretical contexts to include all investment assets - sometimes called a market portfolio in these contexts, but is in practice a subset of practically available investable assets.
[8] Active return is often studied in the context of CAPM, the Capital Asset Pricing Model, as that model provides ways to measure and to justify active return.
Assuming all CAPM assumptions hold in the particular context, the estimated beta of the market portfolio excess return is the CAPM beta, the residual (assumed to be zero in a linear regression) represents the residual return in CAPM, and alpha represents active returns achieved through active management of the portfolio.
The assumptions of CAPM also point to ways for active management to achieving active return, which involves investing on information not yet incorporated into the consensus around the market portfolio.
[12] Measurements of active return play a big role in investment manager evaluation, compensation, and selection.
to implement different active decisions, and to communicate with fund sponsors about portfolio performance.