The non-Correlated Alpha (NCAlpha) represents the "productivity" of a fund or portfolio—how much “bang for the buck” you get for a given level of risk versus that provided by a benchmark index. The “father” of NCAlpha, Werner Ganz, expresses it as:
NCAlpha = Returns of fund – (SD of fund / SD of index) * Returns of index
If a fund has twice the volatility of an index and has twice the return, its NCAlpha will be zero. NCAlpha is a variant of the alpha term used in Modern Portfolio Theory. Alpha uses “beta” in place of the relative standard deviation term in NCAlpha. Beta merges standard deviation with the investment’s correlation to the reference index. It allows for de-correlation of the components of the portfolio to reduce the apparent volatility of the portfolio. The higher the NCAlpha number the better.
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