An ad-free and cookie-free website.
Alpha model is a model for forecasting the future return of securities in the coverage universe. Inputs to an alpha model may include fundamental, quantitative or technical factors. An alpha model, when paired with a risk model is used to derive portfolio weights using portfolio optimization software.
Synonym: stock forecast model
For context, in order to compute whether an active management process adds value, like in a backtesting environment, a forecast return is set at each measurement period for all stocks in the benchmark. This requires a lot of data and allows for a regression of current return expectations versus the future return of that investment over different time periods. This makes the calculation of an Information Coefficient possible. It is common to create alpha models on the same frequency as portfolio rebalancing, so weekly, monthly or quarterly.
An alpha model is akin to the 'secret sauce' for an active portfolio management firm.
Wes: Exactly why would you want to push our
alpha model up to the cloud?
Guy: I don't know, it just sounds like a cool project.
Many terms have 4-5 minute videos showing a derivation and explanation. If this term had one, it would appear here.
Videos can also be accessed from our YouTube Channel.
If this term had a video, the script would be here.
Click box for answer.
Still unclear on the term Alpha Model? Check out the Quant 101 Series featuring a 27-video deep dive in Excel.
Our trained humans found other terms in the category forecasting models you may find helpful.
Subscribe and join the no-spam email list for more educational nuggets.
A newly-updated free resource. Connect and refer a friend today.