Alpha Alignment Factor: A Solution to the Underestimation of Risk for Optimized Active Portfolios
TITLE: Alpha Alignment Factor: A Solution to the Underestimation of Risk for Optimized Active Portfolios
SPEAKER: Dr. Anureet Saxena
The underestimation of risk of optimized portfolios is a consistent
criticism about risk models. Quantitative portfolio managers have
historically used a variety of ad hoc techniques to overcome this issue
in their investment processes. In this paper, we construct a theory
explaining why risk models underestimate the risk of optimized
portfolios. We show that the problem is not necessarily with a risk
model, but is rather the interaction of expected returns, constraints,
and a risk model in an optimizer. We develop an optimization technique
that incorporates a dynamic Alpha Alignment Factor (AAF) into the factor
risk model during the optimization process. Using actual portfolio
manager backtests, we illustrate both how pervasive the underestimation
problem can be and the effectiveness of the proposed AAF in correcting
the bias of the risk estimates of optimized portfolios.
Dr. Anureet Saxena is a research associate at Axioma Inc. Prior to joining Axioma in 2008, he held research positions at Carnegie Mellon University (Egon Balas, mentor), Tata Institute of fundamental research (Narendra Karmarkar, mentor) and T.J. Watson Research Center (IBM).
His research interests include mixed integer linear and non-linear programming, stochastic programming and quantitative finance. He has published four scholarly articles in Mathematical Programming and has delivered more than thirty presentations at various professional meetings. Dr. Saxena is the recipient of the 2008 Gerald L. Thompson doctoral dissertation award in management science for his thesis titled Integer Programming, a Technology. He holds MS and PhD in industrial administration from Tepper School of Business (CMU), BTech in computer science and engineering from IIT Bombay and is currently a level 2 candidate in the Chartered Financial Analyst (CFA) program.
- Workflow Status: Published
- Created By: Anita Race
- Created: 04/14/2010
- Modified By: Fletcher Moore
- Modified: 10/07/2016