Demystifying Trading Strategy Returns
In this paper, we’ll examine a claim by a portfolio manager (let’s call him trader B) about his ability to generate statistically significant Alpha. Alpha is the excess-return compensation for the risk borne, and thus commonly used to assess active managers’ performances. Using plain summary statistics and empirical distribution plots (e.g. Histogram, QQ-Plot), we identified a single data-point with relatively high-return, and once excluded from the sample, the so-called alpha simply vanished.
August 21, 2012
