Portable Alpha

DEFINITION of 'Portable Alpha'

A strategy in which portfolio managers separate alpha from beta by investing in securities that differ from the market index from which their beta is derived. Alpha is the return achieved over and above the return that results from the correlation between the portfolio and the market (beta). In simple terms, portable alpha is a strategy that involves investing in areas that have little to no correlation with the market.

BREAKING DOWN 'Portable Alpha'

Portfolio return is based on two aspects. The first is beta, which is the extent to which an investment vehicle moves with the market and can be said to represent passive returns, which occur as a result of an increase along with the overall market. The second is alpha, which is a measure of a manager's ability to generate returns by choosing stocks or other investments that will outperform the market in a given time period, and can be said to represent the returns generated by active-management techniques.

If a portfolio manager can improve alpha by investing in securities that are not correlated with the beta of an existing portfolio, that manager will have created a portable alpha.

RELATED TERMS
  1. Alpha

    Alpha is used in finance to represent two things: 1. a measure ...
  2. Tainted Alpha

    An alpha return that cannot be attributed solely to the money ...
  3. Alpha Generator

    Any security that, when added to an existing portfolio of assets, ...
  4. Beta

    Beta is a measure of the volatility, or systematic risk, of a ...
  5. Excess Returns

    Investment returns from a security or portfolio that exceed a ...
  6. International Beta

    Better known as "global beta", international beta is a measure ...
Related Articles
  1. ETFs & Mutual Funds

    Alpha and Beta for Beginners

    An in-depth look at what alpha and beta are and what they measure.
  2. Managing Wealth

    Evaluating Alpha and Beta

    Alpha and beta are risk ratios that investors use to calculate, compare and predict returns.
  3. Trading

    Bettering Your Portfolio With Alpha And Beta

    Increase your returns by creating the right balance of both these risk measures.
  4. ETFs & Mutual Funds

    Pursuing Alpha In A Well-Diversified IRA

    This strategy is not as complex as some investment gurus would like you to believe.
  5. Trading

    Measuring And Managing Investment Risk

    Risk is inseparable from return. Learn more about these measures and how to balance them.
  6. Investing

    A Deeper Look At Alpha

    The Jensen index helps investors compare realized returns to what should've been achieved.
  7. Managing Wealth

    More Ways to Evaluate Portfolio Performance

    The Jensen measure is another tool investors use to include risk when measuring portfolio performance.
  8. Managing Wealth

    Beta: Gauging Price Fluctuations

    Learn how to properly use this measure that can help you meet your criteria for risk.
  9. Investing

    How Investment Risk Is Quantified

    FInancial advisors and wealth management firms use a variety of tools based in Modern portfolio theory to quantify investment risk.
  10. ETFs & Mutual Funds

    5 Ways To Measure Mutual Fund Risk

    These statistical measurements highlight how to mitigate risk and increase rewards.
RELATED FAQS
  1. What's the difference between alpha and beta?

    Learn about alpha and beta, two very important technical risk ratios that investors use to evaluate relative performance, ... Read Answer >>
  2. How can I use alpha in conjunction with the Treynor Ratio?

    Learn about alpha and the Treynor ratio and how these metrics are used to assess investment strategy by comparing portfolio ... Read Answer >>
  3. Does a negative alpha automatically mean I should sell?

    Learn how alpha is used to assess an investment's profitability relative to the broader market and why a negative value isn't ... Read Answer >>
  4. Is alpha the best risk measure?

    Read about some of the strengths and weaknesses of alpha, a popular risk-adjusted performance indicator based on modern portfolio ... Read Answer >>
  5. What is the Weighted Alpha formula and how is it calculated?

    Find out how investors and analysts calculate the weighted alpha of a stock's price by emphasizing recent price movements ... Read Answer >>
  6. Stocks with a positive alpha are considered to be underpriced ...

    The correct answer is a): The risk-adjusted return attempts to measure the risks taken to achieve a desired return. Alpha ... Read Answer >>
Hot Definitions
  1. Glass-Steagall Act

    An act the U.S. Congress passed in 1933 as the Banking Act, which prohibited commercial banks from participating in the investment ...
  2. Quantitative Trading

    Trading strategies based on quantitative analysis which rely on mathematical computations and number crunching to identify ...
  3. Bond Ladder

    A portfolio of fixed-income securities in which each security has a significantly different maturity date. The purpose of ...
  4. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  5. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  6. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
Trading Center