Last updated 01/18/2020

NC Alpha - Non Correlated Alpha

NCAlpha is a spreadsheet column. NC Alpha as popularized within the FastTrack community by Werner Ganz. FTAlpha is a extension of Ganz original concept which incorporates correlation and is more powerful than NC Alpha.

Why Use NCAlpha

NCAlpha will help you build a diversified portfolio of stocks or funds which performs well under volatile market conditions. The concept is simple: NCAlpha combines volatility and return into a single indicator value. Assuming your portfolio is adequately represented by the low risk basis, then rankings of any family of funds or stocks using the NCAlpha column will separate those issues into three groups:

1. Positive NCAlpha. These issues added to your portfolio should improve risk/return ratio. 
2. Near zero value NCAlpha: These issues will not change the risk/return of your portfolio.
3. Negative NCAlpha: These issues when removed from your portfolio will hurt  your risk/return ratio.

How to Use

1. Put your major holdings into a family and put the daily AVG for that family into the green ColorBar cell. While this portfolio is not perfect match your holdings returns, it will likely mimic the ups and downs of your real portfolio.
2. View one year on the Charts and hit the Home Key to put the pole at the first day.
3. Go to the spreadsheet and add NC Alpha and Correlation columns.
4. Load t any diverse stock or fund family into the spreadsheet.
5. Click the header of the NC Alpha column to sort in order.

Test this procedure ranking a chart period for one year ending 90 days ago. See if your decisions made using these techniques really works. Changing a single issue may hurt or help. Changing 25% of your portfolio quarterly adding and removing several issues is generally required for consistent results.

Using this technique ranking 5-10 year periods will likely require 5-10 years to show consistent results AND requires at least annual rebalancing of the issues using momentum techniques

Interpretation #1: Building a Portfolio

• Adding issues to your portfolio with High NCAlpha Value and Low Correlation < 50) improves performance and decreases volatility (SD) or your portfolio as a whole. FTAlpha actually incorporates this computation
• Adding issues with positive NC Alpha and high correlation will improve portfolio performance, but with increased volatility. 
• Adding Issues with Low NCAlpha and High Correlation= will hurt portfolio return without reducing risk.
• Adding Issues with Low NCAlpha and Low Correlation will hurt return, but may substantially reduce risk. Bear funds often fall into this category.

Interpretation #2: Managing a Portfolio

In step 5 load a family of all your holdings. 

• Increase your position in issues with High NC Alpha and Low correlation. This will reduce volatility and increase return.
• Increase positions in specific issues with positive NC Alpha and high correlation while reducing positions in issues that are highly correlated to these specific Issues. This will increase return and reduce risk. 
• Increase your positions in issues with neutral  NCAlpha (hovering around Zero) and low Cor=. This will reduce volatility without hurting return.
• Sell issues with  negative NCAlpha and high Cor= .
• Review issues with negative NCAlpha and low Cor=. These may or may not be providing a comforting hedge.

Funds with low absolute value NC Alpha and low correlation are not hurting return and are likely reducing volatility. 

LIMITATIONS:

This analysis presumes that the relative volatility of the issue with your portfolio will continue and that the performance of the issue relative to your portfolio will continue. Relative volatility is more persistent than return. Watch out for short term high flyers with low correlation and high Alpha . . . the low correlation will likely continue, but the high returns may fail.

As with most technical analysis, funds are easier to analyze than stocks. Funds, including sector funds, will be more likely to continue their past volatility and relative return than stocks. Add a single, large fund position to your portfolio to improve volatility will likely be more effective than adding three smaller stock positions. However, in bear markets, it may be difficult to find funds, other than bear funds, which will help your portfolio.