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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