Does leverage affect alpha?

Using a leveraged bonds fund improves the portfolio optimization picture because you simply multiple the bond fund’s alpha (and beta). Greater alpha typically translates to a better portfolio.

Does leveraging your portfolio increase systematic risk?

This increase in systematic risk per amount of investor capital in the portfolio can be considered the definition of portfolio leverage. By keeping the amount of investor capital the same and borrowing cash to invest in additional securities, the investor is increasing their exposure to systematic risk/beta.

Can leverage effect coexist with value effect?

Researchers found that the effect of leverage in explaining variations in equity is very complex. (2007) find a negative relationship between leverage and equity returns. Further, Narayanaswamy and Phillips (1987) added that stocks’ risk is not only affected by firm leverage but also by the leverage of other firms.

What does leveraging your portfolio do?

If you want to earn more from your portfolio, it may be time to leverage. Leverage involves borrowing money to create higher returns. While borrowing money may sound like a bad idea to some, by leveraging your portfolio, you can enhance your earning and earn favorable tax treatment.

What is leveraged and unleveraged portfolio?

A Company can be categorized as Leveraged if it is Operating with the use of borrowed money. Whereas, A company that is operating without the use of borrowed money can be categorized as having an Unleveraged portfolio. The company is liable to pay to them even in case of loss.

Which type of risk is unaffected by portfolio diversification?

Unsystematic risk, or company-specific risk, is a risk associated with a particular investment. Unsystematic risk can be mitigated through diversification, and so is also known as diversifiable risk.

Which effect is responsible for leverage effect?

The “leverage effect” refers to the well-established relationship between stock returns and both implied and realized volatility: volatility increases when the stock price falls.

Why does leverage increase volatility?

The word leverage effect refers to the notion that return volatility increases more as a result of negative returns than it does as a result of positive returns (i.e. asymmetric volatility). Confusingly, this is sometimes called the leverage effect hypothesis (see Ericsson et al. 2007).

What is a good portfolio alpha?

An alpha of zero suggests that an asset has earned a return commensurate with the risk. Alpha of greater than zero means an investment outperformed, after adjusting for volatility. When hedge fund managers talk about high alpha, they’re usually saying that their managers are good enough to outperform the market.

How do you define Alpha in Fama French?

Define alpha as Portfolio (Asset) Return minus Benchmark, how we tend to think of alpha. But re-arranging the model would make alpha equal to the Portfolio Return minus Benchmark plus other factors. So now alpha = alpha + stuff. As you can see I am lost and need some clarification about alpha in Fama French.

How does the Fama-French model work?

In words, the Fama French model claims that all market returns can roughly be explained by three factors: 1) exposure to the broad market (mkt-rf), 2) exposure to value stocks (HML), and 3) exposure to small stocks (SMB). For a full recap of exactly how the factors are created, here is a link. A video on how this works (and spreadsheet ):

How do allocators use the FF model?

Now, an allocator can use the FF model and quickly determine that the manager has little “alpha,” and can switch their allocation into a vanguard small-cap index fund that charges 25bp. If you’re curious, go ahead and drag and drop returns of your favorite ‘active manager’ into the spreadsheet.

Does the FF 3-factor model explain the variability of returns?

And while the FF model inputs are highly controversial, one thing is clear: the FF 3-factor model does a great job explaining the variability of returns. For example, according to Fama French 1993, the 3-factor model explains over 90\% of the variability in returns, whereas the CAPM can only explain ~70\%!