Idola Blogs

Researchers have suspected for some time that emissions from coal-fired power plants in energy-hungry, rapidly industrializing China and India were a major environmental threat: according to the study, over the past two decades, emissions during the combustion of coal, which contains elemental mercury, have declined in North America and Europe, but “increased substantially” in East Asia and India. But exactly how airborne mercury from Asia has been entering deep ocean fish caught thousands of miles away has not been understood until now.

“Mercury researchers typically look skyward to find a mercury source from the atmosphere due to emissions from land-based combustion facilities,” USGS scientist and coauthor David Krabbenhoft said in a statement. “In this study, however, the pathway of the mercury was a little different. Instead, it appears the recent mercury enrichment of the sampled Pacific Ocean waters is caused by emissions originating from fallout near the Asian coasts. The mercury-enriched waters then enter a long-range eastward transport by large ocean circulation currents.”

In mid-depth ocean, the study showed, decomposing algae interact with mercury to form lethal methylmercury that enters the food chain, eventually contaminating tuna and other food fish.

via Mercury in Fish Predicted To Soar | Environmental Working Group.

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Sharpe (1964) had published his capital asset pricing model (CAPM), which indicates that a portfolio’s expected return will increase with its systematic risk (beta) according to the formula

E(Z_p) = z_f + β[E(Z_m) – z_f]          [1]

That is, a portfolio’s expected return  equals the risk-free rate  plus the portfolio’s beta β multiplied by the expected excess return of the market portfolio . Formula [1] defines the portfolio’s expected return as a linear polynomial of the market expected return.

According to CAPM, portfolios may randomly outperform or underperform the market from one year to the next. Over many years, the random good years will tend to cancel the random bad years, and the portfolio’s long-run performance will fall on the capital market line (if it is optimized under CAPM) or under the capital market line (if it is not)

Jensen was interested in whether mutual fund managers add value over the long-term. Could they through skill, privileged information or intuition outperform the market reasonably consistently, year after year? This was not about having randomly good or bad years, but about having good years with noticeable consistently. The CAPM formula [E(Zp) = zf + ß[E(Zm) – zf]] didn’t accommodate this possibility, so Jensen added a term to it that did:

E(Z_p) = α + z_f + β[E(Z_m) – z_f] [2]

and so alpha, α, was born. This allows for a persistent positive contribution to a portfolio’s expected return due to the manager’s skill.

A frequency distribution of the alphas Jensen estimated for 115 mutual funds based on at least ten years of data for each. The vast majority have estimated alphas that are less than zero. The average fund’s alpha was –.011, or –1.1%. Results are after fees but not including sales loads. Returns, and hence alphas, are with continuous compounding. Reproduced from Jensen(1986).

Jensen’s results lent strong support for the efficient market hypothesis, suggesting that no investment managers have positive alpha.

Alpha has become a symbol. It is a one-word moniker for investment managers’ belief they can outperform the market. Alpha is out-performance, and it is the job of an active manager to produce alpha.

Source: alpha