Monday, April 5, 2010
The BETA Significance
by Dr. M. Sury
CHICAGO, APRIL 5 /Everything-Finance.net/ — Sharath Sury explains that the returns from a fund are attributable to three sources – the Manager’s skill, the Market and Random fluctuations. The return derived from the Manager’s skill alone (if consistent during the period of observation) is called Alpha (Greek letter a). The return attributable to the Market is denoted as a multiple Beta (Greek letter b) of the Market’s return. Finally the random fluctuation is denoted as Epsilon (Greek letter e). While this is a simple concept, there is quite a bit of complexity swept under the word “Market”.
When the investable universe is U.S. Domestic equities (more specifically, the members of an index such as S&P 500), then the market is that index and so the volatility of the index becomes the Market risk. Beta, in this case, represents the “relative volatility” (called Covariance) in the fund per unit level of Market volatility. The return of the fund attributable becomes Beta* X where X is the return of the S&P 500. When we take this more precise definition, and analyze what is practiced in the industry, we come to realize that the definition of Market can be different in different contexts. Thus, for example, we look at both equities and debt instruments; the Market has to include not only Stocks, but Bonds of all types as well. If we wish to include the entire World Markets, then the return attributable to market is Beta*W where W is the return of a portfolio that consist of all bonds and equities in the entire world.
To simplify the discussion, some analysts have taken the approach that the return W of the entire World market is not significantly different from a “workable subset” such as the MSCI World Index and any small difference can be included in the Epsilon factor. This still does not address the fact that there are other asset classes (e.g. Commodities and real estate) that also can be invested and are actually traded in practice.
Yet another complexity in defining the “market” is the inability (or unwillingness) of the investor to participate in certain segments of the market. For example, an investor may wish to invest only in Socially Responsible Investments (SRI). This would then restrict what the “Market” can include.
Thus, for an investment advisor, the practical approach consists of the following steps: (a) Determine the “universe of investments” applicable to this investor and identify one or more (non overlapping) asset classes that represent this universe (b) Identify the allocation of assets to be invested in each class (c) construct a “custom index” using these allocations and find the “calculated returns” of the custom index to be used as the “Market return” X and (d) use statistical “regression” technique to find the regression coefficient of the Fund’s historical returns relative to the corresponding market returns X.
There are several variations of the above technique in the literature using multi- dimensional Statistics which are beyond the scope of this note.
Saturday, March 6, 2010
Sharath Sury Explains The Alpha to Eager Finance Enthusiasts and Focused Students Online
Posted by Everything-Finance.net STAFF on 3/6/10
SANTA CLARA, Calif. March 6/Everything-Finance.net/ -- With many finance students and enthusiasts eager to solidify the concepts of Alpha and Beta within the context of the recent Alternative Investment Summit chaired by Mr. Sharath Sury, many followers have shown continued interest online, posting comments on various blogs that reveal an eagerly awaiting clarification of this elusive Alpha by an experienced, esteemed professional like Sharath Sury - an internationally recognized expert in Risk Management and Asset Allocation. As a former VP at Goldman Sachs, and CEO Emeritus of S4 Capital, Sharath Sury handled very complex investment portfolios of some of the nation's most wealthy families and individuals. Mr. Sury is has been recognized by numerous notable magazines as one of the top professionals in his field. Also a revered university instructor, Professor Sury has established a forum for the research and discussion of new developments in economics and finance, with an emphasis on risk management and innovation. Who better to answer our audience's questions than Mr. Sury, himself? Everything-Finance.net now has the exclusive, wealth manager's definition of Alpha by Professor Sharath Sury, in his own words:
"In any investment strategy, there are essentially three components to the ex-post return: market related exposure (beta), manager skill or 'risk adjusted excess return' (alpha), and randomness. The goal of any active investment manager is to maximize alpha to the extent possible as this is the portion of the return that is attributable to the manager's skill or strategy. In most cases, it is extremely difficult to know what alpha a manager will produce 'before the fact (ex ante)', however, there are certain clues that can help provide guidance on whether a manager is capable of delivering alpha. Among these maybe: superior execution, highly developed capital market analytic skills, superior processing of public information, ability to exploit systematic mispricings, etc. These and other such sources of alpha are colloquially referred to as 'edge'. Every successful investment manager always strives to maximize their edge, and thus their alpha."
Professor Sharath Sury has also generously extended his hand to Everything-Finance.net, offering his expertise again soon! In the near future Sharath Sury will answer, conceptually clarify, and define additional special investment terms that have significant importance in current and future economic climates. Special thanks to Professor Sury for taking the time to briefly analyze and precisely define these terms in efforts to help students (and enthusiasts, alike) avoid further confusion on what can already be very complicated subject material. This is especially true -- as we've found with the Alpha -- if you're not careful about where, and in what context, you find a certain definition.
About Sharath Sury - Founder and Executive Director of the SCU/Sury Initiative for Financial Innovation & Risk Management (SIFIRM) at Santa Clara University in California’s Silicon Valley, Sharath Sury devotes his time and energy to bringing together thought leaders who can address the development of real-world solutions to the current economic climate. Sharath Sury has worked with some of the brightest and most experienced experts in finance and risk management and aims to bring a greater sense of ethics and responsibility to his profession. Through his efforts, Professor Sury has established this invaluable forum for the research and discussion of new developments in the world of economics and finance and has attracted a renewed spirit of innovation to the industry. Sharath Sury also serves as an Adjunct Professor of Economics at the University of California and Adjunct Professor of Finance at DePaul University in Chicago. Sharath Sury's interest and experience in wealth management began as an Associate and later Vice President at Goldman, Sachs & Co. He later founded and worked at S4 Capital, where he earned numerous accolades for his work.
SOURCE: Everything-Finance.net
http://blog.everything-finance.net/2010/03/06/exclusive-sharath-sury-explains-the-alpha-to-finance-enthusiasts-worldwide-on-everythingfinancenet.aspx
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Posted by Everything-Finance.net at 3/6/2010 11:13 AM | Add Comment
Saturday, January 16, 2010
If you have an interest in *anything* related to finance, then It would be worth your time to check out the blog:
http://blog.suryonline.net !
It contains some very interesting Finance articles and Videos, including Implementing Alternative Investments.
