Portable Alpha

Portable Alpha

The strategy of portfolio managers separating alpha from beta by investing in securities that differ from the market index from which their beta is derived. Alpha is the return achieved over and above the return that results from the correlation between the portfolio and the market (beta). In simple terms, this is a strategy that involves investing in areas that have little to no correlation with the market.

Notes:

Portfolio return is based on two aspects. The first is beta, which is the extent to which an investment vehicle moves with the market, and can be said to represent the passive returns (their increase in value along with the overall market). The second is alpha, which is a measure of a manager's ability to generate returns by choosing stocks or other investments that will outperform the market in a given time period, and can be said to represent the returns generated by active-management techniques.

If a portfolio manager can improve alpha by investing in securities that are not correlated with the beta of an existing portfolio, that manager will have created a portable alpha.

See also: Alpha, Beta, Correlation, Jensen's Measure, Portfolio Management, Portfolio Manager