Archive for the ‘Alpha Portfolio’ Category

Alpha InvestmentsBelow is a short summary of all the stocks mentioned in the Alert! series and their subsequent price performance.  The column “closing price (DP)” quotes the price the day after the post was live:

 

Stock Date posted Closing Price Last closing price % gain
HK2777 Nov-18 10.54 11 4.4%
HK8220 Nov-11 0.13 0.157 20.8%
HK282 Oct-02 0.88 1.48 68.2%
HK2688 Sep-02 30.85 34.65 12.3%

 

All positive gains!  Congrats to those who found our articles interesting for action!

Nov 27th is an important date on Next Media as that is the date of signing for the Taiwan Business sale announced as of now.  More to come later on this!

-Mr. Alpha

 

AlphaAlpha (a.k.a. Jensen’s Alpha) is a risk-adjusted performance measure on an actual portfolio return (Rp) relative to its expected return (benchmark RB). Positive Alpha means the portfolio outperformed its benchmark and vice versa. In other words, Alpha tells us how much a portfolio beats its benchmark, and thus it’s often used to measure how well a mutual fund manager performs. Simply speaking,

 

Alpha = RpRB   ……………………………….(1)

 

Usually, we’d take market as our benchmark. The most popular way to estimate the benchmark return is through the use of Capital Asset Pricing Model (CAPM):

 

RB = Rf + Beta * (Rmkt – Rf)  ……………………………….(2)

 

where Rf = Risk-free Rate, Rmkt = Expected Market Return, and Beta = Systematic Risk (a.k.a. market risk or undiversifiable risk). (Rmkt – Rf) is known as Market Risk Premium.

CAPM assumes the portfolio is well-diversified eliminating any unsystematic risk (i.e. company-specific risk) and leaving only systematic risk. Systematic risk, Beta, is the sensitivity of the expected portfolio return (RB) to the expected market return (Rmkt). One way to estimate Beta is to regress historical portfolio returns against historical market (e.g. Hang Seng Index) returns. The slope of such regressed line is Beta. The greater the correlation coefficient between the two returns indicates a stronger linear relationship and a more reliable Beta.

A positive return with high Beta means a return following a positive market return. Beta that is greater than one is simply a leverage on market return. If there was a downturn in the market, a high Beta could cause severe loss to the portfolio. That’s why Beta is called market risk.

Combining equations (1) and (2),Watch Full Movie Online Streaming Online and Download

 

Alpha = Rp – [Rf + Beta * (Rmkt – Rf)]  ……………………(3)

 

As we can see, Alpha is actually the return in excess of the reward for the market risk. A positive return with high Alpha implies a high fund manager’s stock screening ability as the actual portfolio return depends less on the market.

Let’s take an example. Suppose our stock portfolio has an actual annual return of 15%. With reference to the Hong Kong 10-year government bond’s average rate, risk-free rate is equal to about 1% per annum. If market risk premium (Rmkt – Rf) and Beta equal 9% and 1 respectively. By applying equation (3), Alpha is 15% – (1% + 1*9%) = 5%, which has outperformed the market by 5%. However, if Beta equals 2, Alpha becomes -4%. In this case the portfolio has underperformed the market by 4%, even though the actual annual return is positive.

With the aid of Alpha Investments* Statistics Webpage, it’s very easy to determine the portfolio Beta of stocks that are traded in Hong Kong market. Stock Beta is computed as stock returns are regressed against HSI returns. For instance, suppose our portfolio consists of stocks shown in the following table. After retrieving each stock Beta from Alpha Investments Stats page, we can calculate the portfolio Beta as the weighted sum of stock Beta. With the actual portfolio return and the value of portfolio Beta on hand, we can estimate Alpha performance of our portfolio and see how well we actively manage our portfolio from time to time.

 

Stock Beta# Weight Beta * Weight
CHEUNG KONG 長江實業 (00001.HK) 1.07 30% 0.321
YUEXIU PROPERTY 越秀地產 (00123.HK) 1.46 15% 0.219
CCB 建設銀行 (00939.HK) 1.09 20% 0.218
CHINA MOBILE 中國移動 (00941.HK) 0.88 15% 0.132
CHINA LIFE 中國人壽 (02628.HK) 1.18 20% 0.236
#Beta values were taken as at 18Oct2012 Portfolio Beta 1.126

 

-Mr. Alpha

*Alpha Investments (English: http://alphainvestments.hk/en/ ;Chinese: http://alphainvestments.hk) is a website dedicated to analyze historical investment data for the Hong Kong market. It provides an intuitive platform for market participants to use to identify potential trends from pricing and volume history, and therefore, to seek Alpha.

Alpha Fundamentals Ranking - Banks

Alpha Fundamentals Ranking – Banks

If we look at 2011 annual report data for the Banking Industry ranking Net Profit Growth,  PE, ROE, and Cost-to-Income ratios equally, the below is the top 3 names of what we get from clicking here:

1. MINSHENG BANK 民生銀行 (01988.HK)

2. CITIC BANK 中信銀行 (00998.HK)

3. CQRC BANK 重慶農村商業銀行 (03618.HK)

 

The reason why I chose these factors is to  find quality (high Net profit growth + high ROE) amongst cheapness (low PE + low Cost-to-Income ratio).

The screener allows you to select different factors you want to contribute to your stock screening process, such as using Price to Earnings ratios (PE), Return on Equity (ROE), and Net Income Growth.  The more advantageous the attribute, the lower the ranking.

For example, a PE of 5 would receive a lower ranking number than a PE of 10.  A 25% ROE would rank lower than ROE of 10%. The final rank for the stock is the sum of the ranks of each factor chosen.  So in essence, each factor chosen is equally weighted.

– Mr. Alpha

Free Throw Contest Probability Graph

Free Throw Contest Probability Graph

This post aims to answer the question we posed before and discuss how this is relevant to investing:

If you were offered HKD 10,000 for sinking free throw shots, which one would you choose?

A) You are only offered 1 shot. If you sink it, you win HKD 10,000.

B) You are offered 3 shots, but you have to make any 2 of the 3 shots to win HKD 10,000.

The answer is, “it depends on your skill”.

(This picture is from the book “Are you smart enough to work at Google”?)

 

The intuitive answer from the graph above is that, if you were a good free throw shooter (probability of sinking a basket is higher than 50%), shooting more shots allows you to demonstrate your skill more, and thus your chance of winning the contest is higher than just shooting one shot.  If you are not so good at free throws, then shooting 1 shot is a better strategy as you might get “lucky”.

For someone like Mr. Alpha, he would most definitely be choosing to shoot one shot only for the chance to win HKD 10,000.

So, how about answering an interview question like that at the search engine company we have all grown accustomed to using? 🙂

 

For Investing, we get a lot of “it depends” answers as well.  “Is this stock going to rise or fall?”, well, that depends on the overall market environment we are in, and our understanding of the data we use to make our investment decisions.  What we would like to do is to raise awareness to the logic of how AlphaInvestments.hk is generating data and security lists from a current and historical perspective.

 

– Mr. Alpha

 

 

If you were offered HKD 10,000 for sinking free throw shots, which one would you choose?

A) You are only offered 1 shot.  If you sink it, you win HKD 10,000.

B) You are offered 3 shots, but you have to make any 2 of the 3 shots to win HKD 10,000.

 

Mr. Alpha