what is alpha in terms of portfolio mgt? how to increase your alpha?

As far as I know Alpha is the outperformance of the market or the benchmark by your fund.It is a measure of a fund's risk relative to the market. The formula for alpha is the following:[ (sum of y) - ((b)(sum of x)) ] / n Where:n = number of observations b = beta of the fund x = rate of return for the markety = rate of return for the fundIncreasing Alpha means taking more unsystematic risk compared to the passive strategy and results in a higher total risk of the actively managed portfolio. Alpha does not capture this increase in risk.

what is the passive strategy? Alpha does not capture this increase in risk. >> Why?From a portfolio mgt's view, how to increase my unsystematic risk?

Passive strategy = buy and hold, ride the market (Passive strategy can also generate significant alphas depending on the structure of the portfolio).I think pcg is sayting that Alpha does not capture the additional "active management" risk. Increase unsystematic risk = decrease diversification, asset class selection, market timing, etc.

QuoteOriginally posted by: jomniPassive strategy = buy and hold, ride the market (Passive strategy can also generate significant alphas depending on the structure of the portfolio).I think pcg is sayting that Alpha does not capture the additional "active management" risk. Increase unsystematic risk = decrease diversification, asset class selection, market timing, etc.Would you please give me an example how to use passive strategy to generate more alphas?

QuoteOriginally posted by: JQuoteOriginally posted by: jomniPassive strategy = buy and hold, ride the market (Passive strategy can also generate significant alphas depending on the structure of the portfolio).I think pcg is sayting that Alpha does not capture the additional "active management" risk. Increase unsystematic risk = decrease diversification, asset class selection, market timing, etc.Would you please give me an example how to use passive strategy to generate more alphas?Wouldn't the definition of a passive portfolio be one that have and alpha of zero? The only way to generate alpha (out-performance), would be to have positions different from the benchmark portfolio, and if you do this, you won't be a passive manager anymore, no?

There are different degrees of "pasiveness" if you wish. Mutual fund managers ussualy considered passive, since they don't trade a lot and their benchmark is index or some sector. By slightly tilting the weights in their portfolio (relative to the benchmark portfolio), they are trying to outperform their benchmark. As opposed to mutual fund managers hedge fund managers are trading a lot, trying to generate returns for any market. The popular type of active strategies is so called market neutral, where your long positions are balanced by shorts and your portfolio beta is almost zero (or even sector neutral), so most of the return comes from the bets independent of the general direction of the market. It is customary to call the expected return of the portfolio alpha (or individual stock), as mentioned below it can be measured relative to some benchmark such as index, sector, risk free rate or it can have also absolute meaning