Friday, March 03, 2006

Alpha and Beta

Just updating my spreadsheets ready for March which includes reporting on performance etc. I keep track of the two best known parameters in modern portfolio theory - alpha and beta. The chart shows my alpha and beta estimated over the 36 months preceding each data point. So March 2006's data point is based on a regression from April 2003 to March 2006 on monthly data. The regression compares my portfolio performance to my MSCI World Index benchmark. Alpha is reported as the annual risk adjusted rate of return by which I exceed the benchmark index.

The interesting thing about this is that recently my alpha has been very positive - i.e. adjusted for risk I easily beat the market. The other interesting thing is that alpha is rising over time. This is a beautiful example of a learning curve :)

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