Alpha Uncertainty Principle

15 Pages Posted: 9 Sep 2012

Date Written: September 8, 2012


Whereas return is risky, excess return (alpha) is uncertain. This distinction has surprisingly broad practical implications for investors. Alpha-Uncertainty is a new pair relationship to be considered along the Risk-Return relationship established by modern portfolio theory. Uncertainty manifests itself in popular characterizations of unexpected randomness such as fat-tail risk, black-swans, and can help to understand the mechanisms behind the recent financial crisis. In addition to passive uncertainties which we need to manage, in search of alpha we actively create exposure to uncertainty, which we often cannot see, and seldom control. The risk-uncertainty distinction is important to investors because: Fortunes are made by investing in uncertainty, Fortunes are preserved by investing in risk, and Fortunes are lost by exposure to uncertainty.

Keywords: Asset Allocation, Alpha, Uncertainty, Excess Return, Modern Portfolio Theory

JEL Classification: Asset Allocation

Suggested Citation

Zaker, Sassan, Alpha Uncertainty Principle (September 8, 2012). Available at SSRN: or

Sassan Zaker (Contact Author)

Bank Julius Baer & Co. Ltd. ( email )

P. O. Box, CH-8010

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