Explain the risk measures built into equity portfolio construction and how caps on them alter the portfolio

Managers limit absolute risk, measured by portfolio volatility, value at risk or conditional VaR, and relative risk, measured by active risk against the benchmark. They also cap sector, country and factor deviations, single-stock weights, leverage and liquidity. Limits may be heuristic, such as a cap of benchmark weight plus a few points, or formal constraints inside an optimiser. Tight active-risk limits pull the portfolio towards the index, lower Active Share and shrink expected alpha. Loose limits allow concentrated bets but raise the chance of large shortfalls. Limits interact: a VaR cap can bind in volatile markets and force selling. The trap is setting limits that are inconsistent with the alpha target, so the mandate cannot realistically meet its return objective.