My company's multi-asset fund has been using risk metrics methodology to calculate ex-ante VaR and tracking error for years. Due to hardware limitation, the calculation only reflects active risk from asset allocation (e.g. O/W S&P 500 by 2ppt), assuming our portfolio managers largely replicate the benchmarks.
However, my boss is concerned about the active risk from security selection. He tasked me to explore whether it is possible to combine the ex-ante active risk from asset allocation with the ex-post active risk from security selection to estimate the total risk and tracking error. My question is whether this addition makes sesnse? What is the assumed correlation between the two active risk measures(i.e. 1 to be prudent or 0 to be realistic)?
Kindly advise if you have any ideas or come across any literature on this. Thanks