Which components make up the total return according to the MSA model?

The total return according to the MSA (Multi-Factor Model) relates to the various components that help explain how investment returns are generated. The correct answer focuses on market return, style return, and active return.

Market return refers to the return associated with the overall performance of the market, reflecting how well the market performs as a whole. Style return pertains to the performance attributed to specific investment styles, such as growth versus value investing. This component captures the systematic effects based on the investment style applied. Active return measures the performance differential generated through active management strategies, as opposed to the returns that could have been obtained by simply holding a benchmark index.

These three components are essential in understanding the diversification of returns in an investment portfolio as they address both the systematic factors capturing the market-wide movements and the idiosyncratic factors deriving from specific management strategies.