Probabilistic alpha and beta: quantifying an uncertain edge

In finance, the performance of an asset is often quantified by alpha (the excess returns above a benchmark return) and beta (the volatility or risk of the asset relative to a benchmark). In this post, we develop time-varying, probabilistic versions of alpha and beta, and go through the process of using these new metrics to build a dynamic stocks/bonds portfolio to improve on the classic 60/40 portfolio.