RT Journal Article SR Electronic T1 Do Risk Factors Eat Alphas? JF The Journal of Portfolio Management FD Institutional Investor Journals SP 12 OP 25 DO 10.3905/jpm.2008.709976 VO 34 IS 4 A1 Jyh-Huei Lee A1 Dan Stefek YR 2008 UL https://pm-research.com/content/34/4/12.abstract AB Although widespread, the practice in portfolio optimization of using different factor models for risk and alpha has potential pitfalls. Discrepancies between risk and alpha factors can create unintended exposures in optimized portfolios that may hamper performance. An analysis reveals the root of the problem. The optimizer emphasizes the portion of the manager's alpha that is not captured by the risk factors. Aligning the risk and alpha models may lead to better portfolios, even if doing so worsens the overall risk forecasts. In this article, four ways of remedying these problems are presented and compared using familiar optimization problems. The results are promising.TOPICS: Volatility measures, statistical methods, factor-based models