The Integration of the Alpha Alignment Factor and Earnings Forecasting Models in Producing More Efficient Markowitz Frontiers

Abstract

There is a rich literature describing the association of earnings forecasting models and stock returns. We use an earnings forecasting model that employs forecasted earnings yield, earnings per share forecast revisions, and breadth of earnings per share forecasts to serve as a stock selection model. The earnings forecasting model is an input to a portfolio optimization analysis in which fundamental and statistical-based risk models are used. Moreover, an alpha alignment factor is employed to aid in portfolio construction.