# How does one create an alpha signal

I am curious and want to do some personal research into alpha signals, but I couldn't find much relevant information. What I think will be the way to is to start with a return series, build a long- short portfolio (e.g. top/bottom decile or some more refined ML techniques), take those returns calculate z-scores and do s.th like

z-score * IC * volatility


to get a real alpha signal that I can use in a portfolio optimisation context. Would be great to get more insight.

• Generally, the questions of type "How to make money?" are off topic here. – LazyCat Jun 4 '17 at 17:27
• If the goal is to only understand how to generate an alpha signal in general terms that could be fed in something like Black and Litterman, I thinks its okay. Asking for a method to generate alpha for today's markets? Not so much. – Bob Jansen Jun 4 '17 at 17:54
• I am interested in the concept, I thought that's fine as it's a big part of factor research. – ThatQuantDude Jun 4 '17 at 19:21
• One paper I know that talks about how to incorporate empirical data signals into a portfolio optimisation is Brandt's well known paper on Parametric Portfolio Policies. But I don't think that paper talks about Alpha per se. – Alex C Jun 4 '17 at 19:52
• The only 'practical' publication I could find was from MSCI titled 'Converting Scores into Alphas'. – ThatQuantDude Jun 4 '17 at 19:58