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===The love-hate relationship between [[Alpha]] and [[Vega]]=== | ===The love-hate relationship between [[Alpha]] and [[Vega]]=== | ||
All this talk of [[ | All this talk of [[Greeks]] brings to mind the critical distinction between [[alpha]], [[beta]] and [[vega]]. Strictly speaking, the measure of [[alpha]] excludes the amplifying effects of [[leverage]] (borrowing to invest in the strategy, magnifying profits and losses of a dollar invested). [[Leverage]] increases the volatility of portfolio returns. But volatility is measured by [[vega]], not [[alpha]]. While fund managers, particularly rubbish ones, are keen on conflating these two, they are, in fact, very different. | ||
For one thing, it’s much easier to create [[vega]]: anyone and, indeed, everyone can: you simply introduce [[leverage]]. (Have a [[mortgage]] on your house? congratulations; you’ve generated [[vega]]). | For one thing, it’s much easier to create [[vega]]: anyone and, indeed, everyone can: you simply introduce [[leverage]]. (Have a [[mortgage]] on your house? congratulations; you’ve generated [[vega]]). |