Chapter 32 CAIA Flashcards - Portfolio Management, Alpha, and Beta
Smart Beta
Smart beta is the strategy of implementing a rules-based portfolio weighting scheme based on one or more characteristics in the underlying assets that generates portfolio weights that differ from a market-capitalization weighting scheme. The objective in implementing a smart beta strategy is to generate an improved combination of risk and return relative to a market-capitalization weighting approach by forming a portfolio that over-weights those systematic risk exposures that are perceived to offer superior risk-adjusted returns.
Portfolio Weights of Smart Beta Strategies
Generally, smart beta strategies have portfolio weights that: Seek to capture an attractive systematic risk premium. Are based on fixed rules using measurable security characteristics. Differ moderately from market-capitalization weights. Maintain broad portfolios rather than highly concentrated portfolios.
Distinguishing Alpha from Beta
Distinguishing alpha and beta involves measurement and attribution and the process of identifying how much of an asset’s return is generated by alpha and how much is generated by beta.
Separating Alpha from Beta
Separating alpha and beta involves portfolio management and refers to attempts to independently manage a portfolio’s alpha and its exposure to beta, each toward desired levels.
Portable Alpha
Portable alpha is the ability of a particular investment product or strategy to be used in the separation of alpha and beta. Portable alpha is the ability to exploit alpha by investing in an alpha-producing strategy while simultaneously managing a target beta exposure. The manager can add the alpha of the strategy to the existing portfolio without substantially altering the final beta of the portfolio. Derivatives are the primary tool for controlling beta while porting alpha.
Zero Sum Game
A zero-sum game is a market, environment, or situation in which any gains to one party must be equally offset by losses to one or more other parties.
Conditions that make Alpha a Zero Sum Game
Investors have the same investment horizon. Investors have the same level of risk tolerance. Investors are allowed the same access to all asset classes (there is no market segmentation). Investors pay the same tax rate, or, equivalently, there is no tax. Investors have the same expectations about return and asset class risk premiums. Investments can be divided and traded without cost.
