Thursday, May 28, 2009

Alpha is a portfolio’s performance minus the performance of a hypothetical benchmark portfolio of equivalent risk

From Reuters:

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Felix Salmon

nonrival, nonexcludable

May 28th, 2009

Defining alpha

Posted by: Felix Salmon
Tags: investing

One of the more challenging and interesting aspects of being a financial journalist is trying to define terms like convexity and covariance for a lay audience — it’s not easy. So I was particularly taken with Justin Fox’s one-sentence definition of alpha in his new book on the efficient markets hypothesis:

Alpha is a portfolio’s performance minus the performance of a hypothetical benchmark portfolio of equivalent risk.

Elegant, eh? It’s a shame, in a way, that it arrived just as the reputation of CAPM is hitting new lows and the race for alpha is looking increasingly laughable."

Me:

In the same way that the prevalence and power of Ponzi Schemes is connected to the mellifluous sound of the name ‘Ponzi’, so Seeking Alpha drew its power from connotations with the concept of ‘Seeking Enlightenment’. Alpha is a powerful symbol as well, connoting both Science and Gematria. But, truly speaking, isn’t the importance of seeking in the very act of seeking? For example:

“Tzedek Tzedek Tirdof”

It doesn’t say anything about catching up. I think Proust means something similar when he says:

“car les vrais paradis sont les paradis qu’on a perdus.”

The opposite applies as well, as the Temptations put it so well in their classic song, which is especially relevant today, “Ball Of Confusion”:

“Run, run, run but you sure can’t hide”

One last point: In all these stories about how the future hasn’t turned out to be as cool as expected, with no flying cars, say; I am the only one who’s wondering about what happened to the Orgasmatron?

- Posted by Don the libertarian Democrat

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