CAIA Chapter 6: Alpha and Beta
Alpha and Beta
Alpha and Beta
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Cartes-fiches
Beta
represents or measures systematic risk. Beta is the proportion by which an asset's excess return moves in response to the market portfolio's excess return. Beta refers to bearing of risk wherein the underlying risk is systematic and is potentially rewarde
Alpha
measures superior performance. Is the extent to which the skill, information and knowledge of an investment manager can be used to construct portfolios with superior risk-adjusted returns.
Es ante alpha
is the expected superior return if positive (or inferior if negative) offered by an investment on a forward-looking basis after adjusting for the effects of the riskless rate and of systematic risks (beta) on expected returns
Ex-post alpha
is the amount of return, observed in retrospect, of an investment above or below the risk-free rate after adjusting for the effects of beta. Asset outperformd or underperformed its benchmark. Can be result of luck and/or skill. Can be estimated
Model misspecification
is any error in the identification of the variables in a model or any error in identification of the relationships between the variables.
Return attribution
the primary goal of return attribution is distinguishing between the effects of systematic risk (beta), the effects of skill (ex ante alpha) and the effects of idiosyncratic risk (luck). Identification of a benchmark or asset pricing model
Ex ante or expected return
depends entirely on ex ante alpha and beta
Beta nonstationarity
refers to the tendency of the systematic risk of a security, strategy, or fund to shift through time
Beta creep
is when hedge fund strategies pick up more systematic market risk over time
Beta expansion
is the perveived tendency of the systematic risk exposures of a fund or asset to increase due to chanes in general economic conditions
Full market cycle
is a period of time containing a large representation of market conditions, especially up, or bull, markets and down, or bear, markets
Abnormal return presistence
is the tendency of idiosyncratic performance in one time period to be correlated with diosyncratic performance in a subsequent time period
beta driver
an investment that moves in tandem with the overall market or a particular risk factor
alpha driver
an investment that seeks high returns independent of the market
Equity risk premium (ERP)
the long-term tendency of beta drivers to earn higher returns on equity than on risk-free investments as compensaiton of bearing risks
Equity premium puzzle
the long-term tendency of US equities to have performed much better than can be explained purely by risk aversion
Passive beta driver
follow up-and-down the movement of the market on a one-to-one basis
product innovators
alpha drivers that create new invesment opportunities, they include the active management part of the investment industry
Asset gatherers
are the large-scale index trackers who produce passive products tied to well-organized financial market benchmarks. They build value through scale and processing efficiency
Process drivers
are beta drivers that focus on proficing beta that is more and more fine tuned or differenciated. Example are exchange-traded-funds. Many ETFs provide beta for a particular market capitalization range, industry, asset class or geographic market
