The Alpha* Statistic by Thomas Becker, Ph.D.

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Fri, 2011-03-18

The α* statistic was introduced by Richard C. Marston in 2004 as a measure of risk-adjusted excess return. The idea of risk-adjusted excess return is based on the premise that comparing the return of a manager to that of a benchmark is inherently unfair. That is because the risk levels of the manager and the benchmark are almost always different. Therefore, comparing the returns of two portfolios with different risk levels amounts to an apples-to-oranges comparison.  The α* statistic normalizes the risks of the manager and benchmark, creating an apples-to-apples comparison.


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