I thought that Alpha was excess returns meaning it is Alpha = Actual return - Forecasted return But for Treynor Black it is Alpha = Predicted Returns - Expected or Required Return (CAPM) [Schweser Notes Book 5, 253] For Market Model it is Alpha = Realized Return - Predicted Return (which is (Beta for asset i) x (Market Return) How is predicted return asset’s Beta x Market Return? And why is Treynor Black’s Alpha Predicted instead of Actual Return? Isn’t it just … Realized (Actual) Return - Expected Return?
- Asset Beta * Market Return estimates the required return of a particular security incorporating its risk relative to the market. 2. TB is a forward looking portfolio management tool which estimates the future yield of a particular security, hence “predicted”. You are not measuring an actual or realized return here since you are forecasting the yield.
Ah~~ got it, thanks!