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Market Benchmark: Adjust for Beta
The Advanced Parameters tab in the Edit Analysis Parameters dialog allows the user to set a number of parameters that modify the way the calculations are made.
Some people feel that calculating any statistic of a manager vs. a Market Benchmark is inherently unfair because in all likelihood, the risk characteristics of the manager and the benchmark are different. Adjusting the Market Benchmark for beta is one possible way to eliminate this unfairness.
Adjusting for beta means replacing the Market Benchmark with a composite made up from the original Market Benchmark and cash, with beta as the Market Benchmark's weight and (1 - beta) as the weight for cash.
In StyleADVISOR, the option to adjust the Market Benchmark for beta affects the Scan, Performance Attribution and Performance charts as well as the Style and Performance tables. Generally speaking, the effect is that whenever a statistic vs. Market Benchmark other than alpha or beta is calculated, the beta adjusted Market Benchmark is used instead. The Performance graph is different insofar as the Market Benchmark is not replaced; rather, the beta-adjusted Market Benchmark is offered as an additional choice in the right-click menu.