Janus: The Roman god of alpha/beta separation?
Mar 25th, 2007 | Filed under: Portable Alpha & Alpha/Beta SeparationJanus, the company whose logo looks like an early version of that face transplant performed in France last year, has come out with an intriguing offering that aims to separate alpha and beta investment decisions. It’s called “Modular Portfolio Construction” and according to Janus’ website, it’s targeted squarely at financial advisers.
In fairness, the “face transplant logo” is actually a representation of the Roman god of new beginnings named - you guessed it, Janus (as in Jan-uary). If Modular Portfolio Construction catches on, Janus hopes it might someday be recognized as a new beginning for retail portfolio construction. Say the rocket scientists at “Janus Labs”:
“Today’s complex markets require more innovation and comprehensive solutions to investing than ever before. Traditional approaches, nine-box style grid, and core/satellite models may not meet those expectations.
“What’s needed is a flexible framework hat will help your clients take full advantage of all the market has to offer today - all of its differentiated and non-correlated choices, the latest in active management and near-term macroeconomic opportunities.”
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How can alpha increase standard deviation? Here’s how. They draw from two different theories. One from mpt the other from capm.
beta = rho*sdev1*sdev2/var1
E(rp) = rf + (rho*sdev1*sdev2/var1)(rm - rf)+ alpha
Alpha = rp - rf - (rho*sdev1*sdev2/var1)(rm - rf)
You can see that an instrument has a beta of zero and still outperforms the rf…even the rf will have some sdev. The alpha will have a SE. The Information Ratio is alpha/SE or in the case of a market neutral the sharpe ratio.