The authors argue that alphas do not provide an optimal guide to portfolio optimization. Although it is widely believed that overweighting assets with positive alphas and underweighting assets with negative assets is a good policy for increasing the Sharpe Ratio, the authors argue that for shifts greater than 1% of the benchmark weight, weighting by alpha can be detrimental to the portfolio. The authors show that when portfolio weights are shifted, the alphas a changed, causing the portfolio to be suboptimal in large weight shifts.
LEVY, M., & ROLL, R. (2016). Seeking Alpha? It’s a Bad Guideline for Portfolio Optimization. Journal of Portfolio Management, 42(5), 107–112.
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