Practical Applications of Alpha Signals, Smart Beta, and Factor Model Alignment

Abstract

How can a portfolio manager properly identify the underlying drivers of return and incorporate this information into a reliable risk model? In the process of portfolio evaluation and rebalancing, there can be a misalignment between the manager’s understanding of what drives returns—whether it is alpha or smart beta factors—and the risk model.

In Alpha Signals, Smart Beta, and Factor Model Alignment , Terry Marsh of the University of California, Berkeley and Quantal International and Paul Pfleiderer of Stanford University investigate smart beta and risk model forecasting. In this discussion with Marsh, he discusses the article and offers additional perspective on why he and his co-author decided to explore the drivers of return and the corresponding risk factors.