Equity R29 - Well structured portfolio BB ex 8

In the well structured portfolio example (no. 8) given in curriculum, how can there be negative alpha even after beating the benchmark index with lower volatility? And how did they get the value of alpha?

Any insight into this appreciated.

You can get neg alpha even after beating benchmark… because you may have taken more risk.

ex-post alpha = Actual return - expected Return

Expected Return = some function of beta such as Rf + B(Rm-Rf)

In this particular example, the portfolio risk is in fact lower than the benchmark :slight_smile:

After re-reading I understand this a little better now. What’s happened is that the custom portfolio’s returns (a major portion of it) are coming from factor exposures. And return from factor exposures is “alternative” beta, not alpha.

So the custom portfolio returns = returns from factor exposures + alpha. In this case, the PM beat benchmark because he got lucky. Without factor exposures, his return would be in fact less than benchmark.