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fromminato
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Joined: July 22nd, 2007, 8:43 pm

Portfolio Alpha

May 21st, 2020, 7:04 pm

Hi, my question is about calculating Alpha for a portfolio at different periods MTD, QTD and YTD.

Given that Alpha for a single position = Realized Return - CAPM Expected Return = Realized Return - (Rf + Beta*(Rm - Rf) ).

In the case of a portfolio, Return = Sum (Weight(i) * Return(i) ), where i represents each single position in the portfolio.

Assuming that weights are going to change during the calculation period, Alpha calculation becomes tricky as to how to handle weights MTD, QTD, etc... I have seen a Long/Short hedge fund using the average of daily weights, and I am wondering if some of you have insights to share on how this is answered in the market.

Appreciate if you could share references I could review. Many thanks.
 
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Alan
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Re: Portfolio Alpha

May 24th, 2020, 4:55 pm

There are many types of performance measures with no "industry standard". When I worked for a money manager, we handled that in client reporting by simply adopting a reasonable method and then clearly documenting it in reports. Maybe things have changed but, at least at the time, the portfolio alpha was one of those non-standard measures.  
 
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fromminato
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Joined: July 22nd, 2007, 8:43 pm

Re: Portfolio Alpha

May 24th, 2020, 6:00 pm

Hi Alan and thanks very much for getting back to me. Would it possible for you please to share the methods have you used or come across for Portfolio Alpha. Much appreciated.
 
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Alan
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Re: Portfolio Alpha

May 24th, 2020, 6:25 pm

Well, for our separately managed US equity accounts, which all reported monthly, my recollection is we would just wait for some period to elapse (say 2 years). Then (each month), run a standard OLS regression of excess returns from the portfolio against the S&P500 excess total returns. So, the data each month would be monthly account returns from inception of the account through the report date. We would report the intercept (alpha) and slope (beta). I can't remember if we reported t-stats or R^2 or other diagnostics for the estimates. 

Only our mutual funds had daily return calculations. I suppose one could do the same thing for those, but I don't believe we did. The only 'special' reporting I recall for mutual fund clients (beyond standard SEC measures) was an Internal rate of return for each client, using their individual cash flows. 
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