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Rethinking Valuation and Pricing Models by Greg N. Gregoriou, Christian Hoppe, Carsten Wehn

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24

Active Portfolio Construction When Risk and Alpha Factors are Misaligned

Ralph Karels and Michael Sun

MSCI Consultants

Chapter Outline

24.1 Introduction

When looking at active portfolio optimization, there are three main ingredients: The portfolio manager’s return forecasts (alphas), a portfolio risk forecast and a risk aversion parameter.

In an ideal world, one factor model should account for both risk and return forecasts. In practice, however, portfolio managers use different models ...

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