Contact Us

If you still have questions or prefer to get help directly from an agent, please submit a request.
We’ll get back to you as soon as possible.

Please fill out the contact form below and we will reply as soon as possible.

  • Courses
  • Home
  • Economics, Finance, & Analytics
  • Research, Quantitative Analysis, & Decision Science

Alpha Risk - Explained

What is Alpha Risk?

Written by Jason Gordon

Updated at April 16th, 2022

Contact Us

If you still have questions or prefer to get help directly from an agent, please submit a request.
We’ll get back to you as soon as possible.

Please fill out the contact form below and we will reply as soon as possible.

  • Marketing, Advertising, Sales & PR
    Principles of Marketing Sales Advertising Public Relations SEO, Social Media, Direct Marketing
  • Accounting, Taxation, and Reporting
    Managerial & Financial Accounting & Reporting Business Taxation
  • Professionalism & Career Development
  • Law, Transactions, & Risk Management
    Government, Legal System, Administrative Law, & Constitutional Law Legal Disputes - Civil & Criminal Law Agency Law HR, Employment, Labor, & Discrimination Business Entities, Corporate Governance & Ownership Business Transactions, Antitrust, & Securities Law Real Estate, Personal, & Intellectual Property Commercial Law: Contract, Payments, Security Interests, & Bankruptcy Consumer Protection Insurance & Risk Management Immigration Law Environmental Protection Law Inheritance, Estates, and Trusts
  • Business Management & Operations
    Operations, Project, & Supply Chain Management Strategy, Entrepreneurship, & Innovation Business Ethics & Social Responsibility Global Business, International Law & Relations Business Communications & Negotiation Management, Leadership, & Organizational Behavior
  • Economics, Finance, & Analytics
    Economic Analysis & Monetary Policy Research, Quantitative Analysis, & Decision Science Investments, Trading, and Financial Markets Banking, Lending, and Credit Industry Business Finance, Personal Finance, and Valuation Principles
  • Courses
+ More

Table of Contents

What is Alpha Risk?How does Alpha Risk Work? Academics Research on Alpha Risk

What is Alpha Risk?

Alpha Risk refers to the risk that a null hypothesis (one which states that there is no difference between two variables) will be discarded even when it is absolutely correct. Usually known as the Type I error, the null hypothesis, in this case, states that there is no difference in two variables that are being tested, like zero or 1. For a null hypothesis to be discarded, there must be someone who feels that there is a difference between both variables when no there actually is none. To reduce the possibility of alpha risks, one must be willing to increase the size of the test or sampling to the point that it matches the population.

Back to: RESEARCH, ANALYSIS, & DECISION SCIENCE

How does Alpha Risk Work? 

In finance, one can incur an alpha risk in analysing returns of an equity. Let us assume that an investor is looking for good investments, but he or she wants something other than 10% annual returns on equities. In the process, he or she tests samples of returns as well as analyse historical data to check if returns are higher or lower than 10%. After testing, this investor comes up with a result that is higher than 10%, thus rejecting the null hypothesis, which states that there is no significant difference between the two variables. In a case where the original return was actually 8% annually, the investor will be said to have committed a Type I error. Alpha risk can lead to unprofitable investments, as participants might feel that the return is higher than what is actually specified, whereas, it is lower than that.


alpha risk

Was this article helpful?

Yes
No

Related Articles

  • Back of the Envelope Calculation - Explained
  • Law of Large Numbers - Explained
  • Decision Tree - Explained
  • Management and Decision Making - Explained



©2011-2021. The Business Professor, LLC.
  • Privacy

  • Questions

Definition by Author

0
0
Expand