When evaluating a fund manager, the formula for active return is...

Active return is a measure that helps investors assess how much a fund manager's investment portfolio has outperformed or underperformed a benchmark index. The formula for calculating active return captures this difference between the actual portfolio performance and the performance of a benchmark.

When you take the portfolio return and subtract the benchmark index return, you are effectively measuring the added value (or alpha) that the fund manager has produced through their investment decisions as compared to a passive investment in the benchmark. A positive active return indicates that the manager has outperformed the benchmark, while a negative active return indicates underperformance.

This understanding is vital for investors who want to evaluate the skill of fund managers in generating excess returns relative to an appropriate benchmark, which serves as a standard for judging performance. The focus on the difference between these two returns is what makes the active return formula relevant and practical for performance evaluation.