UNIT 4
Alpha, Beta & Hidden Risk
Beta is sensitivity to a benchmark; alpha is unexplained return within a chosen model.
Return sourceBeta 1.45Alpha?
How much performance came from common market exposure versus residual results.
- Evaluating active managers
- Understanding portfolio behavior
- Models omit risks
- Relationships change
Calling all benchmark outperformance alpha.
Factor models improve attribution, but estimated alpha remains model- and sample-dependent.
60-SECOND CHEAT SHEET
Remember this.
- 1Beta = market sensitivity
- 2Alpha depends on the model
- 3Leverage can mimic skill