Alpha forecasts must be ____________ to account for less-than-perfect forecasting quality. When alpha forecasts are ____________ to account for forecast imprecision, the resulting portfolio position becomes ____________.
A) shrunk; shrunk; far less moderate
B) shrunk; shrunk; far more moderate
C) grossed up; grossed up; far less moderate
D) grossed up; grossed up; far more moderate
E) None of the options are correct.

Question

Quizplus · Accepted Answer

Alpha forecasts should be shrunk to account for less-than-perfect forecasting quality. When alpha forecasts are shrunk to account for forecast imprecision, the resulting portfolio position becomes far more moderate, reflecting a more cautious investment strategy that acknowledges the uncertainty in the forecast.

Alpha Forecasts Must Be ____________ to Account for Less-Than-Perfect Forecasting