Buffett's Alpha

Andrea Frazzini, David Kabiller, Lasse Heje Pedersen

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Abstract

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.
Original languageEnglish
JournalFinancial Analysts Journal
Volume74
Issue number4
Pages (from-to)35-55
Number of pages21
ISSN0015-198X
DOIs
Publication statusPublished - 2018

Cite this

Frazzini, Andrea ; Kabiller, David ; Pedersen, Lasse Heje. / Buffett's Alpha. In: Financial Analysts Journal. 2018 ; Vol. 74, No. 4. pp. 35-55.
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Frazzini, A, Kabiller, D & Pedersen, LH 2018, 'Buffett's Alpha', Financial Analysts Journal, vol. 74, no. 4, pp. 35-55. https://doi.org/10.2469/faj.v74.n4.3

Buffett's Alpha. / Frazzini, Andrea; Kabiller, David; Pedersen, Lasse Heje.

In: Financial Analysts Journal, Vol. 74, No. 4, 2018, p. 35-55.

Research output: Contribution to journalJournal articleResearchpeer-review

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