Decomposition of ex post Active Return. CFA L3

CFA Level III Portfolio Management
#1

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My understanding is that the first part of the equation, which is the rewarded factor return times the difference of the betas, is what the text in the prior paragraph describes as “alternative beta”.

The text also says alpha + epsilon part of the equation is the part of the return that can’t be explained by exposure to rewarded factors but alpha is attributed to the manager’s skills such as security selection and factor timing.

Isn’t “alternative beta” a managerial skill as well? Or is that purely attributable to the model, which the curriculum deems separate from the manager’s skills (although in reality, a model is only as good as the one who creates it)?

#2

Alternative beta means that the manager’s strategy could be replicated passively. As such, having an active strategy that relies on simply being different from the index (value biased, small cap biased, momentum biased etc.) is no longer a valid source of alpha. Many mutual funds products now offer value biased funds for example. Valid source of alpha are based on factor timing and security selection which add value relative to a passive MF.

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