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Alpha signal definition

Specific to each security, alpha signal is often the combination of many alpha factors and is often standardized before implementation.

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Alpha signal is the net forward-looking estimate of an asset's future potential relative to other securities in the coverage universe. It is input as the numerator for the Mean/Variance optimization. An active manager calculates an expected return, typically using CAPM and then subtracts that from the forecast return in order to arrive at an alpha signal. As an example, if a stock's consensus expected return (from CAPM) is 7%, and the active manager's forecast return is 9%, then the alpha signal is 2%. This signal may further be standardized across all securities in the coverage universe.


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Before optimizing, it is common to standardize the alpha signal using a z-score. | True or False?

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In a Sentence

Guy:  Pam refuses to accept that we need an alpha signal  on every stock, weekly?
Eve:  Fundamentalists and quants haven't gotten along since the beginning of time, and they never will.

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Keywords:
alpha signal
alpha model
forecast
intrinsic value
portfolio optimization
active management
expected return
CAPM
consensus
stocks