Investing Separately in Alpha and Beta by Roger G. Clarke, Harindra de Silva, Steven Thorley

By Roger G. Clarke, Harindra de Silva, Steven Thorley

Via studying the small avalanche of white papers, magazine articles, books, and different resources of knowledge on alpha-beta separation, the authors offer an goal resource of rules, terminology, present perform, and implementation concerns on alpha-beta separation for the institutional funding neighborhood, rather 401-k plan sponsors, foundations, and endowments.

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Extra info for Investing Separately in Alpha and Beta

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S. ) SMB is “small minus big” or small-size premium—the return on a CRSP portfolio consisting of all the stocks in the CRSP database and constructed to be long small-cap stocks and short large-cap stocks. HML is “high minus low” market-to-book ratio, or value premium—the return on a CRSP portfolio that is long value stocks and short growth stocks. UMD is “up minus down” price, or momentum premium—the return on a CRSP portfolio that is long stocks with high past returns and short stocks with low past returns.

78 for the Lehman Aggregate index; and it has a very high Credit factor beta, similar to that for Fund F. 27. 8, which suggests that fixed-income factors other than Duration, Credit, and Prepayment may be at play or that the indices we have chosen only approximately replicate the beta exposures. Given that the Lehman Aggregate index shows an alpha of 47 bps and that one can invest in a Lehman Aggregate index fund, the measured alphas of the three active bond funds are arguably 47 bps too high. Finally, we note that the information ratios for the three active bond funds in our example are fairly similar to the equity funds.

GSCI is excess return on the S&P/Goldman Sachs Commodity Index. NCREIF is excess return on the NCREIF Real Estate Index. ) CAPE is excess return on the Cambridge Associates Private Equity Index. FX is return on the EAFE minus the EAFEH return. 16. 11% Std. dev. 00 Correlation FX 44 ©2009 The Research Foundation of CFA Institute Calculating Alpha and Beta The empirical analysis in this chapter has revealed a number of important concepts about the separation of alpha and beta, in addition to the basic principles illustrated by the numerical examples in Chapter 3.

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