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Intermediate
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.
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Quantitative.
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