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Alpha Model Definition and Quiz

A full-blown alpha model covering all securities is typically employed by quantitative or high frequency firms due to its reliance on computing power.
  1. Define - Define the term Alpha Model.
  2. Context - Use Alpha Model in a sentence.
  3. Quiz - Test yourself.
face pic by Paul Alan Davis, CFA
Updated: February 16, 2021
An alpha model poses a challenge for fundamental managers because it implies that at each measurement period a new return forecast is set. Learn more below.

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Alpha model definition


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.

In a Sentence

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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Alpha models are most typically used by portfolio managers who employ what type of investment philosophy? | Passive, Technical, Quantitative or Fundamental?


The frequency of updates to an alpha model are tied closely with the portfolio rebalance frequency. | True or False?


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Still unclear on the term Alpha Model? Check out the Quant 101 Series featuring a 27-video deep dive in Excel.

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alpha model
forecast return
security forecast
coverage universe
fundamental forecast
quantitative forecast
stock future return
stock expected return
stock risk model
portfolio weight
portfolio optimization
active stock management
stock forecast
return expectations on stocks

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