Alpha Risk
 |
Definition of 'Alpha Risk'The risk in a statistical test that a null hypothesis will be rejected when it is actually true. This is also known as a Type I error. The best way to decrease alpha risk is to increase the size of the sample being tested with the hope that the larger sample will be more representative of the population. |
 |
Investopedia explains 'Alpha Risk'An example of alpha risk in finance would be if one wanted to test the hypothesis that the average yearly return on a group of equities was greater than 10%. So the null hypothesis would be if the returns were equal to or less that 10%. In order to test this, one would compile a sample of equity returns over time and set the level of significance. If, after statistically looking at the sample, you determine that the average yearly return is higher than 10%, you would reject the null hypothesis. But in reality, the average return was 6% so you have made a type I error. The probability that you have made this error in your test is the alpha risk. This alpha risk could lead you to invest in a group of equities when the returns do not actually justify the potential risks. |
Related Definitions
Articles Of Interest
-
5 Ways To Measure Mutual Fund Risk
These statistical measurements highlight how to mitigate risk and increase rewards. -
Adding Alpha Without Adding Risk
Learn how to generate higher returns in your portfolio while keeping the same risk profile. -
What Are The Odds Of Scoring A Winning Trade?
Just because you're on a winning streak, doesn't mean you're a skilled trader. Find out why. -
Financial Markets: Random, Cyclical Or Both?
Are the markets random or cyclical? It depends on who you ask. Here, we go over both sides of the argument. -
Insure Your Future With A Career As An Actuary
If you've got excellent math skills, they can add up to a lucrative career as an actuary. -
What Type Of Trader Are You?
There are different ways stock traders attempt to profit from market movements. Which of the strategies do you use? -
Mergers And Acquisitions: Understanding Takeovers
In the dramatic world of M&As, battleground terms meld with bizarre metaphors to form the language of the game. -
Interpreting A Company's IPO Prospectus Report
Learn to decipher the secret language of the IPO prospectus report - it can tell you a lot about a company's future. -
After A Big Recovery Rally, It's Up To Renew Blue For Best Buy
Investors have bought Best Buy's story, but this quarter shows that a lot of work remains to be done -
If You Don't Mind Volatility, Deere Could Still Do Alright
Though Deere's shares sold off after earnings, the business model is sound and rolling along.
Free Annual Reports
