Finance Lunchbox

Alpha as a Statistical Outlier

The article questions the potential hand of dumb luck in portfolio manager performance, something the alpha formula, by virtue of being so tightly synonymous with “performance,” fails to recognize, but which some evidence supports. Please return later to read update.





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4 Responses to “Alpha as a Statistical Outlier”

DR BakerAugust 12th, 2013 at 3:18 pm

This is a good perspective. Clustering is an aspect of randomness that escapes common perception and drives mistaken investment chasing phantom mavens. However, I also think that looking at finance as pure randomness can get you in serious trouble when trying to diversify.

Simple Bayesian updating can show that doubting the fairness of the coin fundamentally changes risk calculation.

Thanks for your post.

David StackpoleAugust 12th, 2013 at 9:27 pm

DR, I agree. Thank you for clarifying the need for diversification. I was particularly interested in how alpha symantically offers no room when considering degrees of randmomness in the mix.

Thank you for the link as well.

DRBAugust 14th, 2013 at 7:14 am

The idea that our pensions are paying their managers millions of dollars to be baffled by streaks in coin-flipping is quite amusing. It almost makes one think that they are making money from their position, rather than their natural talent and education.

Thank you for bringing this to light.

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