0
$\begingroup$

I am sorry for my incompetence. I am new in Quantitive Finance, so I read an article about the relationship between Alpha and Portfolio Risk and I can not understand what is the meaning behind the orthogonality in Finance. For example, I met these sentences: "Alpha is the search of sources of risk and return that are ideally orthogonal from the manager is using already."Maybe here "orthogonal" means different? And: "Alpha must be orthogonal to widely-known factors and to other alphas in portfolio". What does it mean?

Thanks a lot!

$\endgroup$
  • 1
    $\begingroup$ Two zero-mean time series $x_t,y_t$ are orthogonal if there is zero covariance between them $E(\sum_t x_t y_t)=0$. $\endgroup$ – noob2 Nov 10 '16 at 13:50
  • $\begingroup$ Igor Tulchinsky wrote "orthogonal' to show how knowledgeable he is, but you are right that if he talked about "different sources of risk and return" instead he would have expressed the same thought and would have been understood by more people. $\endgroup$ – noob2 Nov 11 '16 at 20:48
  • $\begingroup$ If the answer was helpful your accepting it is appreciated - Thank you $\endgroup$ – vonjd Dec 11 '16 at 16:52
1
$\begingroup$

Although this question is not a good fit for this forum (too basic) I answer it anyway:

It means that both are statistically independent. So intuitively when one income stream goes up the other either goes up too, or goes down or stays the same - completely independently.

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.