We're using cookies, but you can turn them off in your browser settings. Otherwise, you are agreeing to our use of cookies. Learn more in our Privacy Policy

Bridge over ocean
10 September 2018 Financial Analysts Journal Volume 74, Issue 4

Buffett’s Alpha

  1. Andrea Frazzini
  2. David G. Kabiller, CFA
  3. Lasse Heje Pedersen

Warren Buffett’s Berkshire Hathaway has realized a Sharpe ratio of 0.79 with significant alpha to traditional risk factors. The alpha became insignificant, however, when we controlled for exposure to the factors “betting against beta” and “quality minus junk.” Furthermore, we estimate that Buffett’s leverage is about 1.7 to 1, on average. Therefore, Buffett’s returns appear to be neither luck nor magic but, rather, a reward for leveraging cheap, safe, high-quality stocks. Decomposing Berkshire’s portfolio into publicly traded stocks and wholly owned private companies, we found that the public stocks have performed the best, which suggests that Buffett’s returns are more the result of stock selection than of his effect on management.

Read the Complete Article in Financial Analysts Journal Financial Analysts Journal CFA Institute Member Content