The Integration of the Alpha Alignment Factor and Earnings Forecasting Models in Producing More Efficient Markowitz Frontiers

Effectiveness of earnings forecasts in efficient global portfolio construction

“…Shao, Rachev, and Mu (2014) use a sophisticated time series model which combines ARMA, GARCH and multivariate normal tempered stable innovations to model the CTEF variable for portfolio construction, and then examine the performances of optimal portfolios based on the meanexpected-tail-loss criterion. Beheshti (2014) considers the mean-variance efficient frontier for the earnings forecast models and investigates how the integration of the alpha alignment factor improves the efficient frontier.…”

Effective Stock Selection and Portfolio Construction Within US, International, and Emerging Markets

“…A portfolio with 0AAF can be thought of as a traditional mean variance optimization model, which is compared to optimization models that are augmented with varying levels of AAF. The application of AAF within our portfolio construction process helps to control unintended systematic bets [21] which are caused by alignment issues between our expected returns, constraints, and risk model factors. Through empirical case studies Saxena and Stubbs [4,22] demonstrated that the risk under-estimation problem ties back to the fact that optimized portfolios share a common property, namely, these portfolios possess systematic exposures uncorrelated to the factors of the risk model used to create them.…”