Axioma's Alpha Factor Method: Improving Risk Estimation By Reducing Risk Model Portfolio Selection Bias

A new method is described for using factor risk models when estimating portfolio risk and constructing optimal portfolios. This patent-pending method, designated the Alpha Factor Method, adjusts the factor risk model risk estimate of a portfolio suspected of having underestimated risk. This reduces the risk underestimation bias that is unavoidable for optimized portfolios. Empirical backtests indicate that use of the Alpha Factor Method improves...