Alpha Beta check for Stocks:
Alpha and beta are utilized in finance to analyze investment performance and risk. Alpha is a measure of an investment’s excess return over a benchmark, which reflects its capacity to beat the market. Beta, meanwhile, is a measure of the investment’s volatility in relation to the overall market.
Alpha:
- Definition: Alpha is a measure of an investment’s abnormal return, or the return over and above what would be expected by a model of the market (such as the Capital Asset Pricing Model).
- Interpretation: Positive alpha reveals that the investment outperformed what was expected based on its level of risk, and negative alpha implies poor performance.
Beta:
- Definition: Beta is a measurement of an investment’s price sensitivity to movements in the overall market.
- Meaning: A beta of 1 implies the price of the investment moves with the market. A beta of more than 1 implies that the investment is more volatile than the market, and less than 1 implies less volatility.
- Illustration: If a stock has a beta of 1.5, it would move 1.5 times as much as the market in either direction.
Relation between Alpha and Beta:
- Risk and Return: Alpha and beta are related. High alpha with high beta implies good performance with more risk. High alpha with low beta is the best, implying outperformance with lesser risk.
- Portfolio Management: Having an understanding of both alpha and beta is important when creating an efficient diversified portfolio. Alpha can be used by investors to locate investments that could prove profitable, and beta can be used to control the overall risk of the portfolio.
Essentially, alpha informs you about how well a given investment has done when compared to expectations, and beta informs you about the risk that investment has.