question about calculating alpha
I was asked this question and I couldn't figure it out. Can someone help me? Thanks!
I know what alpha is but what is "annualized alpha"? I'm guessing it's just the annualized alpha rate. But how would I calculate it?
If someone tells me that he has a 5 year alpha rate of 5, can I find out what the yearly and monthly alpha rate is? How about the reserve?
You can. Results will vary on how you calculate the returns though. If you calculate them using the geometric method (which is what mutual funds are required to do) then you're letting the returns compound. If you do it arithmetically, you're not.
Geometric Returns (yearly): 5^(1/5) Geometric Returns (monthly): 5^(1/((512)) Arithmetic Returns (yearly): 5/5 Arithmetic Returns (monthly): 5/(512)
Don't know what you mean by the reserve.
thx for clearing it up for me. but just to confirm, a 5 year alpha of 5 means that from year 0 to year 5, you beat the market by 5% in total.
But the monthly geometric returns = 1.027. Does that mean that each month you beat the market by 1%? And that in 60 months, it only adds up to 5% in total?
*Reserve, I meant reverse. IF you knew the monthly data, could you find the year number.
Et ullam veniam qui pariatur est voluptates. Eligendi labore rerum magnam ab ex. Nulla esse ea mollitia voluptatem pariatur amet ab. In vitae maxime aliquid est. Minima rem quia reprehenderit corporis est et soluta.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...