Your Alpha Calibration Obsession Is Wasting Your Time

Introduction

Getting alpha magnitude right is one of the great stress-sources in quantitative investing. Quants spend enormous effort trying to calibrate their signals - is this a 50bp annual return or a 200bp annual return? Turns out, under the most common optimization setup, it doesn’t matter at all. What matters is getting the ranking right.

This comes from a clean mathematical result that practitioners often miss: mean-variance optimal portfolios are homogeneous of degree zero in alpha. Scale all your alphas by any constant, and you get the exact same portfolio weights. The scaling washes out completely.