Term Glossary

Metrics, Models & Concepts

Alpha


Alpha (ex-ante alpha) is a forecast of incremental return after adjusting for time value of money and systematic risk effects. Ex-ante alpha often is estimated as the intercept of an asset pricing model based regression using Single-Index Model \begin{equation} \alpha_\text{ex-ante} = (E(r) - r_{f}) - E(r_{M} - r_f) \end{equation}

\(r\)
asset return
\(E(r)\)
asset expected return
\(r_M\)
market index (benchmark) return
\(r_f\)
risk-free return

An intraday version of ex-ante alpha could be reduced further by setting a risk-free rate equal to zero: \begin{equation} \alpha_\text{ex-ante, intraday} = E(r) - E(r_M) \end{equation}

Ex ante alpha is the return attributable to the skill of the manager.


Function Reference
portfolio_alpha, position_alpha