Passive Return Active Return 2a. Timing Return 2b. Selection Return Portfolio excess return can be decomposed into a passive and active component. The active part of excess return includes the performance components based on selection and on timing information.
Beta also depends on the risk preference of the client and beta is priced on the market.
The goal of performance analysis is the identification of active and passive return components. Active return is further broken down into a timing and a selectivity return component. Statistical techniques are then used to distinguish these systematic performance effects from pure chance and to account for the risks taken to earn them. An information advantage relative to the public is a necessary condition to achieve overperformance. But the possession of such information is only one thing.