Simple and optimal alpha strategy selection and risk budgeting or Goodbye to 91.5 per cent and all that

Robert Scott ()
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Robert Scott: Schroder Investment Management

Journal of Asset Management, 2011, vol. 12, issue 3, No 6, 214-223

Abstract: Abstract A simple measure is developed that can determine if investment efficiency is increased by including an alpha strategy. If the correlation between alpha and beta is lower than the ratio of information to Sharpe ratios, the strategy should be pursued. A combined alpha and beta Sharpe ratio measure is developed and used to determine a simple but optimal strategy for an alpha-beta risk budget. When alpha-beta correlation is zero, the risk budget is optimal at the ratio of the information to Sharpe ratios. An optimal risk budget for non-zero correlation is also addressed.

Keywords: risk budgeting; alpha; beta; portable alpha; information ratio (search for similar items in EconPapers)
Date: 2011
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DOI: 10.1057/jam.2011.6

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