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Research Insight - Combining Multiple Sources of Alpha in Portfolio Construction - March 2014

In this Research Insight, we present a methodology for efficiently combining multiple sources of alpha when constructing a portfolio. The first part of our study shows that the most efficient implementation for a single source of alpha is the minimum-volatility factor portfolio, which has the lowest risk for a given level of expected return and, therefore, the maximum expected information ratio.  &In the second part of our study, we examine how to efficiently combine multiple sources of alpha. We find that the optimal portfolio is a weighted combination of the minimum-volatility factor portfolios for each separate signal. Our paper provides examples throughout to illustrate this 'combining alpha' technique and describes the intuition behind each sample portfolio "Pillar 2"