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I've come across a research paper where for a specific period of time, the portfolio has negative returns (or roughly flat returns). During this same period of time, the portfolio's Fama-French 3-factor alpha is fairly positive.

Here is a photo of the returns from the paper, I'm looking at the 2000-2007ish time frame. My understanding is as such, but I'm not completely sure if this is right:

$$ R-R_f = B_1 (R_m-R_f) +B_2 (SMB) + B_3 HML + alpha $$

If in a given year $R_m - R_f$ was -5%, and SMB and HML were zero, but my particular stock (or portfolio) was -2%, I would have +3% alpha. In this way, I would have positive alpha while having negative returns.

Is this understanding correct, or something else?

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It’s definitely possible to have negative returns but positive alpha. It just means that your portfolio had excess return in respect to this particular asset pricing theory. It may very well be possible you’d have a negative alpha in 5-factor model especially if the portfolio had a momentum rally.

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