A Question about Beta Exposure (regarding to Equity Portfolio Management)

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olivia_x

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Hi guys,
This might be a really silly/basic question but appreciate your help please:
In equity portfolio management, isn’t alpha investors should be looking for as that’s the real value add? why do people want to increase beta exposure?
I am asking because I see that the equities strategies (such as Equitizing Long-short strategy) include increasing beta/alpha exposure and I would like to understand why.
I thought that market movements are quite random and volatile so it’s difficult to benefit from beta. Do people do so to speculate on future maybe?
Thanks in advance!
 
If you want to increase alpha, you will have to take on more risk, which means increase beta exposure.
 
The alpha can be achieved without an increase in beta exposure (ex. market-neutral long short strategy). Actually alpha is not related to the level of beta exposure in my humble opinion.
 
It depends on how much alpha you want to achieve and how much risk you want to take, I think. They don’t have to be related but they can be related. Risk and return are positively correlated, right? Like what Magician said,if you are betting on a bull market, I don’t see why you can’t increase beta exposure.
It’s a broad question and hard to answer without more background
 
S2000magician wrote:
olivia_x wrote:[W]hy do people want to increase beta exposure?
Click to expand...
They think that the market’s returns are going to increase.
Riding coattails.
Click to expand...
Hi S2000magician, could you please be more detailed? I am not sure I get it 100%.
So beta exposure is people’s expectation on the certain market they bet on and they will long the stock/future if they believe the market/industry/index would pick up and short the other way around.
And Alpha exposure is the profits from security selection within the market/index/industry?
Also, any direct relationship between alpha and beta maybe?
I am asking because I see that the equities strategies (such as Equitizing Long-short strategy) include increasing beta/alpha exposure and I would like to understand why.
Please correct me I am wrong. Thanks!
 
CFA 2015 wrote:
It depends on how much alpha you want to achieve and how much risk you want to take, I think. They don’t have to be related but they can be related. Risk and return are positively correlated, right? Like what Magician said,if you are betting on a bull market, I don’t see why you can’t increase beta exposure.
It’s a broad question and hard to answer without more background
Click to expand...
Thanks CFA 2015, I see your point. I am not quite sure about the connection betwen alpha and beta though.
Let’s say based on CAPM or any return function, the relationship between portfolilo return and alpha, return and beta is directional but not sure how we can deduct that beta and alpha movements are also directional?
I wrote above and my guess is the return for Equities is composed of portion coming from beta exposure, portion coming from alpha exposure - one is related with the market/industry movements you are betting one and latter is betting on stock selection. But i am not sure if I am making sense..
 
CFA 2015 wrote:
It depends on how much alpha you want to achieve and how much risk you want to take, I think. They don’t have to be related but they can be related. Risk and return are positively correlated, right? Like what Magician said,if you are betting on a bull market, I don’t see why you can’t increase beta exposure.
It’s a broad question and hard to answer without more background
Click to expand...
Alpha and beta are completely unrelated.
 
olivia_x wrote:
S2000magician wrote:
olivia_x wrote:[W]hy do people want to increase beta exposure?
Click to expand...
They think that the market’s returns are going to increase.
Riding coattails.
Click to expand...
Hi S2000magician, could you please be more detailed? I am not sure I get it 100%.
So beta exposure is people’s expectation on the certain market they bet on and they will long the stock/future if they believe the market/industry/index would pick up and short the other way around.
And Alpha exposure is the profits from security selection within the market/index/industry?
Also, any direct relationship between alpha and beta maybe?
I am asking because I see that the equities strategies (such as Equitizing Long-short strategy) include increasing beta/alpha exposure and I would like to understand why.
Please correct me I am wrong. Thanks!
Click to expand...
The market moves in waves. If you expect a bull market, you would increase your beta exposure.
So if you have $1,000,000 in equity on the SP500 (Beta of 1), and you expect the whole market to perform well, you would overweight and underweight certain sectors to increase your beta exposure to say, 1.5.
Now if the market makes 10%, you’ll be making 15%. If you expect a bear market in the next 6 months, you would reduce your beta exposure to 0.5 to minimize the impact of the dip by half.
 
MrSmart wrote:
olivia_x wrote:
S2000magician wrote:
olivia_x wrote:[W]hy do people want to increase beta exposure?
Click to expand...
They think that the market’s returns are going to increase.
Riding coattails.
Click to expand...

Hi S2000magician, could you please be more detailed? I am not sure I get it 100%.
So beta exposure is people’s expectation on the certain market they bet on and they will long the stock/future if they believe the market/industry/index would pick up and short the other way around.
And Alpha exposure is the profits from security selection within the market/index/industry?
Also, any direct relationship between alpha and beta maybe?
I am asking because I see that the equities strategies (such as Equitizing Long-short strategy) include increasing beta/alpha exposure and I would like to understand why.
Please correct me I am wrong. Thanks!
Click to expand...
The market moves in waves. If you expect a bull market, you would increase your beta exposure.
So if you have $1,000,000 in equity on the SP500 (Beta of 1), and you expect the whole market to perform well, you would overweight and underweight certain sectors to increase your beta exposure to say, 1.5.
Now if the market makes 10%, you’ll be making 15%. If you expect a bear market in the next 6 months, you would reduce your beta exposure to 0.5 to minimize the impact of the dip by half.
Click to expand...
Ahha, thanks MrSmart, I thought this at the beginning, was wondering if this is used to bet on the expection of market but cant be sure.
Can I say that: portion coming from Beta exposure is related with the market/industry movements you are betting on (as described by you above); and portion coming from alpha exposure is betting on stock selection?
Many thanks!
 
If you specified a benchmark in advance, let’s say a simple 1.5 beta return hurdle. Then any returns you make in excess of the market% * 1.5 is your alpha, which is attributed to stock selection and weights.
 
MrSmart wrote:
If you specified a benchmark in advance, let’s say a simple1.5 beta return hurdle. Then any returns you make in excess of the market% * 1.5 is your alpha, which is attributed to stock selection and weights.
Click to expand...
Thank you! This answers my question :)
 
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