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TITLE: Alpha Alignment Factor: A Solution to the Underestimation of Risk for Optimized Active Portfolios
SPEAKER: Dr. Anureet Saxena
ABSTRACT:
The underestimation of risk of optimized portfolios is a consistent
criticism about risk models. Quantitative portfolio managers have
historically used a variety of ad hoc techniques to overcome this issue
in their investment processes. In this paper, we construct a theory
explaining why risk models underestimate the risk of optimized
portfolios. We show that the problem is not necessarily with a risk
model, but is rather the interaction of expected returns, constraints,
and a risk model in an optimizer. We develop an optimization technique
that incorporates a dynamic Alpha Alignment Factor (AAF) into the factor
risk model during the optimization process. Using actual portfolio
manager backtests, we illustrate both how pervasive the underestimation
problem can be and the effectiveness of the proposed AAF in correcting
the bias of the risk estimates of optimized portfolios.
Speaker bio:
Dr. Anureet Saxena is a research associate at Axioma Inc. Prior to joining
Axioma in 2008, he held research positions at Carnegie Mellon University
(Egon Balas, mentor), Tata Institute of fundamental research (Narendra
Karmarkar, mentor) and T.J. Watson Research Center (IBM).
His research interests include mixed integer linear and non-linear
programming, stochastic programming and quantitative finance. He has
published four scholarly articles in Mathematical Programming and has
delivered more than thirty presentations at various professional
meetings. Dr. Saxena is the recipient of the 2008 Gerald L. Thompson
doctoral dissertation award in management science for his thesis titled
Integer Programming, a Technology. He holds MS and PhD in industrial
administration from Tepper School of Business (CMU), BTech in computer
science and engineering from IIT Bombay and is currently a level 2
candidate in the Chartered Financial Analyst (CFA) program.
