Idiosyncratic return

Is idiosyncratic return = luck + skill or does it equal to luck only?

Prima Facie it is neither nor. Ideosyncratic Risk/Return is just something that lies within that investment and is not market induced.

As far as I understand the CAIA systematics, ideosyncratic return can become alpha if you have the skill to choose the investments beforehand (ex ante alpha). If you just gamble and by luck you chose investments with ideosyncratic returns, well than its luck.

Imagnine you choose three several stocks that may become merger targets over the next three years (based on skill) -> ex ante alpha.

If you chose the stock by chance you still have ex post alpha, yet its luck only.

Regards

Idiosyncratic risk is company specific risk that can be diversified away. Hence you are not rewarded for this risk.

James - If you’re referring to the CAPM formula then you’re correct, skill + luck, and its the analyst’s challenge to separate the two using the concepts taught in the curriculum (to simplify mattmuell, skill = persistence).

Asset Allocator is correct if you’re referring to Markowitz portfolio theory.