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Backtest Alpha

Hi there, 

I'm just wondering about the 'alpha' statistic that comes up in the 'overall statistics' of a backtest. Is the figure an annual average? 

What is the benchmark?

And for example, if it says alpha = 0.205 does this mean 0.205% average alpha per year? If so I am very confused because my algorithm returns over 3000% (2000-2018) compared to about 97% in the same timeperiod for the S&P500. 

Is there anywhere that explains the alpha shown in the backtest statistics?

 

Any help would be greatlky appreciated, 

Thanks.

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The alpha is calculated with the following formula

alpha = strategyAnnualPerformance - (RiskFreeRate + Beta * benchmarkAnnualPerfomance - RiskFreeRate))

Where RiskFreeRate is 0 by default. The strategyAnnualPerformance is the compounding annualized return of your strategy. 

The default benchmark is “SPY”. You can set your custom benchmark with SetBenchmark(symbol); 

This is how LEAN calculates the alpha

 

https://github.com/QuantConnect/Lean/blob/de9429320aadd8003031557492d0ec9fda4aa289/Common/Statistics/PortfolioStatistics.cs#L192
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The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by QuantConnect. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. QuantConnect makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances. All investments involve risk, including loss of principal. You should consult with an investment professional before making any investment decisions.


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