What is Alpha and Beta
What Is Beta?
Beta is the
volatility of a security or portfolio against its benchmark. It's a numerical value that signifies how much a stock
price jumps around. The higher the value, the more the company tends to
fluctuate in value. Beta measures of systematic risk. It can’t be transferred but hedged
What Is Alpha?
Alpha is a
term used in investing to describe an investment strategy's ability to beat the
market Index , Alpha is thus also often referred to as excess return or abnormal rate of return in relation to a
benchmark, when adjusted for risk. Alpha
is called Unsystematic risk.
Understanding Beta in Investing.
How should
investors assess risk in the stocks that they buy or sell? While the
concept of risk is hard to factor in stock analysis and valuation, one of
the most popular indicators is a statistical measure called beta.
Beta
measures risk in the form of volatility against a benchmark and is based on the
principle that higher risk come with higher potential rewards. Analysts use
beta when they want to determine a stock's risk profile. High beta Stock which
generally means any stock with a beta higher than 1.0, are supposed to be
riskier but provide higher return potential; low-beta stocks, those with a beta
under 1.0, pose less risk but also usually lower returns 2
Understanding Alpha in Investing.
Alpha is one of
five popular technical investment. The others are beta, standard deviation R square, & the sharpe ratio.
These are all statistical measurements used in modern portfolio theory. All of these indicators are
intended to help investors determine the risk-return profile of an investment.
Active portfolio
managers seek to generate alpha in diversified portfolios, with
diversification intended to eliminate unsystematic risk. Because alpha
represents the performance of a portfolio relative to a benchmark, it is often
considered to represent the value that a portfolio manager adds to or
subtracts from a fund's return.
