Chapter 8

  1. abnormal return persistence
    Abnormal return persistence is the tendency of idiosyncratic performance in one time period to be correlated with idiosyncratic performance in a subsequent time period.
  2. alpha
    Alpha refers to any excess or deficient investment return after the return has been adjusted for the time value of money (the risk-free rate) and for the effects of bearing systematic risk (beta).
  3. alpha driver
    An investment that seeks high return independent of the market is an alpha driver.
  4. alternative hypothesis
    The alternative hypothesis is the behavior that the analyst assumes would be true if the null hypothesis were rejected.
  5. asset gatherers
    Asset gatherers are managers striving to deliver beta as cheaply and efficiently as possible, and include the large-scale index trackers that produce passive products tied to well-recognized financial market benchmarks.
  6. backfill bias
    Backfill bias fun, or instant history bias, is when the funds, returns, and strategies being added to a data set are not representative of the universe of fund managers, fund returns, and fund strategies.
  7. backfilling
    Backfilling typically refers to the insertion of an actual trading record of an investment into a database when that trading record predates the entry of the investment into the database.
  8. backtesting
    Backtesting is the use of historical data to test a strategy that was developed subsequent to the observation of the data.
  9. beta creep
    Beta creep is when hedge fund strategies pick up more systematic market risk over time.
  10. beta driver
    An investment that moves in tandem with the overall market or a particular risk factor is a beta driver.
  11. beta expansion
    Beta expansion is the perceived tendency of the systematic risk exposure of a fund or asset to increase due to changes in general economic conditions.
  12. beta nonstationarity
    Beta nonstationarity is a general term that refers to the tendency of the systematic risk of a security, strategy, or fund to shift through time.
  13. causality
    The difference between true correlation and causality is that causality reflects when one variable's correlation with another variable is determined by or due to the value or change in value of the other variable.
  14. cherry-picking
    Cherry-picking is the concept of extracting or publicizing only those results that support a particular viewpoint.
  15. chumming
    Chumming is a fishing term used to describe scattering pieces of cheap fish into the water as bait to attract larger fish to catch.
  16. confidence interval
    A confidence interval is a range of values within which a parameter estimate is expected to lie with a given probability.
  17. data dredging
    Data dredging, or data snooping, refers to the overuse and misuse of statistical tests to identify historical patterns.
  18. data mining
    Data mining typically refers to the vigorous use of data to uncover valid relationships.
  19. economic significance
    Economic significance describes the extent to which a variable in an economic model has a meaningful impact on another variable on a practical sense.
  20. equity risk premium
    The equity risk premium (ERP) is the expected return of the equity market in excess of the risk-free rate.
  21. equity risk premium puzzle
    The equity risk premium puzzle is the enigma that equities have historically performed much better than can be explained purely by risk aversion, yet many investors continue to invest heavily in low-risk assets.
  22. ex ante alpha
    Ex ante alpha is the expected superior return of positive (or inferior return if negative) offered by an investment on a forward-looking basis after adjusting for the riskless rate and for the effects of systematic risks (beta) on expected returns.
  23. ex post alpha
    Ex post alpha is the return, observed or estimated in retrospect, of an investment above or below the risk-free rate and after adjusting for the effects of beta (systematic risk).
  24. full market cycle
    A full market cycle is a period of time containing a large representation of market conditions, especially up (bull) markets and down (bear) markets.
  25. hypothesis
    Hypothesis are propositions that underlie the analysis of an issue.
  26. linear risk exposure
    A linear risk exposure means that when the returns to such a strategy are graphed against the returns of the market index or another appropriate standard, the result tends to be a straight line.
  27. model misspecification
    Model misspecification is any error in the identification of the variables in a model or any error in identification of the relationships between the variables.
  28. null hypothesis
    The null hypothesis is usually a statement that the analyst is attempting to reject, typically that a particular variable has no effect or that a parameter's true value is equal to zero.
  29. outlier
    An outlier is an observation that is markedly further from the mean than almost all other observations.
  30. overfitting
    Overfitting is using too many parameters to fit a model very closely to data over some past time frame.
  31. passive beta driver
    A passive beta driver strategy generates returns that follow the up-and-down movement of the market on a one-to-one basis.
  32. process drivers
    Process drivers are beta drivers that focus on providing beta that is fine-tuned or differentiated.
  33. product innovators
    At one end of the spectrum are product innovators, which are alpha drivers that seek new investment strategies offering superior rates of risk-adjusted return.
  34. p-value
    The p-value is a result generated by the statistical test that indicates the probability of obtaining a test statistic by chance that is equal to or more extreme than the one that was actually observed (under the condition that the null hypothesis is true).
  35. return driver
    The term return driver represents the investments, the investment products, the investment strategies, or the underlying factors that generate the risk and return of a portfolio.
  36. selection bias
    Selection bias is a distortion in relevant sample characteristics from the characteristics of the population, caused by the sampling method of selection or inclusion.
  37. self-selection bias
    If the selection bias originates from the decision of fund managers to report or not to report their returns, then the bias is referred to as a self-selection bias.
  38. significance level
    The term significance level is used in hypothesis testing to denote a small number, such as 1%, 5%, or 10%, that reflects the probability that a researcher will tolerate of the null hypothesis being rejected when in fact it is true.
  39. spurious correlation
    The difference between spurious correlation and the true correlation is that spurious correlation is idiosyncratic in nature, coincidental, and limited to a specific set of observations.
  40. survivorship bias
    Survivorship bias is a common problem in investment databases in which the sample is limited to those observations that continue to exist through the end of the period of study.
  41. test statistics
    The test statistics is the variable that is analyzed to make an inference with regard to rejecting or failing to reject a null hypothesis.
  42. type I error
    A type I error, also known as a false positive, is when an analyst makes the mistake of falsely rejecting a true null hypothesis.
  43. type II error
    A type II error, also known as a false negative, is failing to reject the null hypothesis when is is false.
Card Set
Chapter 8
Alpha, Beta, and Hypothesis Testing