Индикаторы Alpha-beta Trend

We often hear the terms alpha and beta when talking about investments. These are two different measures that are part of the same equation derived from a linear regression. Don't worry if that sounds too complicated, we'll explain it all in this article.

The Equation

If equations make your eyes glaze over, you can just skip this part. On the other hand, we can go straight to the equation if you know some algebra or ever took a class covering regressions in college. The basic model is given by:

• y = a + bx + u

Where:

• y is the performance of the stock or fund.
• a is alpha, which is the excess return of the stock or fund.
• b is beta, which is volatility relative to the benchmark.
• x is the performance of the benchmark, which is often the S&P index.
• u is the residual, which is the unexplained random portion of performance in a given year.

Defining Beta

Beta is a measure of volatility relative to a benchmark, and it's actually easier to talk about beta first. It measures the systematic risk of a security or a portfolio compared to an index like the S&P Many growth stocks would have a beta over 1, probably much higher. A T-bill would have a beta close to zero because its prices hardly move relative to the market as a whole.

Beta is a multiplicative factor. A 2X leveraged S&P ETF has a beta very close to 2 relative to the S&P by design. It goes up or down twice as much as the index in a given period of time. If beta is -2, then the investment moves in the opposite direction of the index by a factor of two. Most investments with negative betas are inverse ETFs or hold Treasury bonds.

What beta also tells you is when risk cannot be diversified away. If you look at the beta of a typical mutual fund, it's essentially telling you how much market risk you're taking.

It's crucial to realize that high or low beta frequently leads to market outperformance. A fund with lots of growth stocks and high beta will usually beat the market during a good year for stocks. Similarly, a conservative fund that holds bonds will have a low beta and typically outperform the S&P during a poor year for the market.

Defining Alpha

Alpha is the excess return on an investment after adjusting for market-related volatility and random fluctuations. Alpha is one of the five major risk management indicators for mutual funds, stocks, and bonds. In a sense, it tells investors whether an asset has consistently performed better or worse than its beta predicts.

Alpha is also a measure of risk. An alpha of means the investment was far too risky given the return. An alpha of zero suggests that an asset has earned a return commensurate with the risk. Alpha of greater than zero means an investment outperformed, after adjusting for volatility.

When hedge fund managers talk about high alpha, they're usually saying that their managers are good enough to outperform the market. But that raises another important question: when alpha is the "excess" return over an index, what index are you using?

For example, fund managers might brag that their funds generated 13% returns when the S&P returned 11%. But is the S&P an appropriate index to use? The manager might invest in small-cap value stocks. These stocks have higher returns than the S&P , according to the Fama and French Three-Factor Model. In this case, a small-cap value index might be a better benchmark than the S&P

There is also a chance that a fund manager just got lucky instead of having true alpha. Suppose a manager outperforms the market by an average of 2% during the first three years of the fund without any extra market-related volatility. In that case, beta equals one, and it might look like alpha is 2%.

However, suppose the fund manager then underperforms the market by 2% over the next three years. It now looks like alpha equals zero. The original appearance of alpha was due to sample size neglect.

Very few investors have true alpha, and it typically takes a decade or more to be sure. Warren Buffett is generally considered to have alpha. Buffett focused on value investing, dividend growth, and growth at a reasonable price (GARP) strategies during his career. A study of Buffett's alpha found that he tended to use leverage with high-quality and low-beta stocks.

The Bottom Line

Alpha and beta are both risk ratios that investors use as tools to compare and predict returns. They're significant numbers to know, but one must check carefully to see how they are calculated.

Beta measures the volatility of a security relative to something else, usually a benchmark index like S&P. To calculate beta, you scatter plot the bar to bar changes of the symbol (stock or fund) along with the bar to bar changes of an index on an XY graph (with the index going on the X axis) for a user-specified period. A best fit (regression) line is then drawn through these points. The slope of that line is beta, while the Y intercept is alpha. A beta that is greater than one means that the fund or stock is more volatile than the benchmark index over the given period, while a beta of less than one means that the security is less volatile than the index. A beta of should be interpreted as follows: the stock/fund would return only 9% while the market/index went up 10%, however, it would it would lose only 9% while the market/index dropped 10%. Similarly, a beta of would be interpreted as follows: the stock/fund would return 15% while the market/index went up only 10%, however, it would it lose 15% while the market/index dropped only 10%. Alpha is a measure of residual risk of an investment relative to some market index. Alpha is the Y intercept of the best fit line mentioned above. Alpha is expected to be equal to risk-free rate times (1 - beta). The following equations explains the relationship between alpha, beta, and the Stock and Index returns.

StockReturn = Alpha + Beta * IndexReturn

The preference windows for both Alpha and Beta are essentially identical. Both ask the user to specify the underlying symbol (generally an index like S&P), a price, a period, and drawing style. Again, the underlying symbol should generally be an index such as S&P, and that symbol should have data for the same period that is being studied. The price should generally be "close", but the user may choose to use something like that High/Low average. Commonly, beta and alpha are calculated over 3 or 5 year periods of monthly data. This would require a period of 36 or 60, and a periodicity of monthly. RTL Token . . . ALPHA / BETA ( more)

Alpha vs. Beta: An Overview

Alpha and beta are two of the key measurements used to evaluate the performance of a stock, a fund, or an investment portfolio.

Alpha measures the amount that the investment has returned in comparison to the market index or other broad benchmark that it is compared against.

Beta measures the relative volatility of an investment. It is an indication of its relative risk.

Alpha and beta are standard calculations that are used to evaluate an investment portfolio’s returns, along with standard deviation, R-squared, and the Sharpe ratio.

Alpha

The alpha figure for a stock is represented as a single number, like 3 or However, the number actually indicates the percentage above or below a benchmark index that the stock or fund price achieved. In this case, the stock or fund did 3% better and 5% worse, respectively, than the index.

An alpha of means the investment outperformed its benchmark index by 1%. An alpha of means the investment underperformed its benchmark index by 1%. If the alpha is zero, its return matched the benchmark.

Note, alpha is a historical number. It's useful to track a stock's alpha over time to see how it did, but it can't tell you how it will do tomorrow.

Alpha for Portfolio Managers

For individual investors, alpha helps reveal how a public or private stock or fund might perform in relation to its peers or to the market as a whole.

Professional portfolio managers calculate alpha as the rate of return that exceeds the model's prediction or comes short of it. They use a capital asset pricing model (CAPM) to project the potential returns of an investment portfolio.

That is generally a higher bar. If the CAPM analysis indicates that the portfolio should have earned 5%, based on risk, economic conditions, and other factors, but instead the portfolio earned just 3%, the alpha of the portfolio would be a discouraging -2%. 

Formula for Alpha:

​Alpha=Start PriceEnd Price+DPS−Start Price​where:DPS=Distribution per share​

Portfolio managers seek to generate a higher alpha by diversifying their portfolios to balance risk.

Because alpha represents the performance of a portfolio relative to a benchmark, it represents the value that a portfolio manager adds or subtracts from a fund's return. The baseline number for alpha is zero, which indicates that the portfolio or fund is tracking perfectly with the benchmark index. In this case, the investment manager has neither added nor lost any value. 

Beta

Often referred to as the beta coefficient, beta is an indication of the volatility of a stock, a fund, or a stock portfolio in comparison with the market as a whole. A benchmark index (most commonly the S&P ) is used as the proxy measurement for the market. Knowing how volatile a stock's price is can help an investor decide whether it is worth the risk.

The baseline number for beta is one, which indicates that the security's price moves exactly as the market moves. A beta of less than 1 means that the security is less volatile than the market, while a beta greater than 1 indicates that its price is more volatile than the market.

If a stock's beta is , it is considered to be 50% more volatile than the overall market.

Like alpha, beta is a historical number.

Beta Examples

Here are the betas for three well-known stocks on November  

Micron Technology Inc. (MU): 
Coca-Cola Company (KO):
SPDR S&P ETY (SPY): 

We can see that Micron was 27% more volatile than the market as a whole, while Coca-Cola was 36% less volatile than the broader market. The SPDRs, or SPYs, have a beta of because this ETF itself tracks the S&P index.

Acceptable betas vary across companies and sectors. Many utility stocks have a beta of less than 1, while many high-tech Nasdaq-listed stocks have a beta of greater than 1. To investors, this signals that tech stocks offer the possibility of higher returns but generally pose more risks, while utility stocks are steady earners.

While a positive alpha is always more desirable than a negative alpha, beta isn’t as clear-cut. Risk-averse investors such as retirees seeking a steady income are attracted to lower beta. Risk-tolerant investors who seek bigger returns are often willing to invest in higher beta stocks.

Formula for Beta

Here is a useful formula for calculating beta:

​Beta=Variance of Market’s ReturnCR​where:CR=Covariance of asset’s return with market’s return​

• Covariance is used to measure the correlation in price moves of any two stocks. A positive covariance means the stocks tend to move in lockstep, while a negative covariance means they move in opposite directions.
• Variance refers to how far a stock moves relative to its mean. It is frequently used to measure the volatility of a stock's price over time. 

Alpha and beta?

The two components of an equation used to describe the performance of stocks and investment funds are alpha and beta. Beta is a metric for comparing volatility to a benchmark, like the S&P After controlling for erratic variations and market-related volatility, alpha is the excess return on an investment. Both alpha and beta are metrics that are used to evaluate and forecast returns.

What is alpha and beta?

Reviewing both of these ideas will undoubtedly enhance the worth of your stock investment choices and help make clear the precise difference between alpha and beta companies.

Let&#;s start by defining Alpha in the context of stock investing. Simply explained, a stock&#;s alpha is a measurement of the return on an investment in stocks in comparison to a benchmark, such an index. It effectively represents the active return realized from the stock&#;s performance after taking volatility and market turbulence into account.

Depending on the performance of the stock, the alpha measure is a single number that can be either positive or negative.

The precise alpha figure displays the exact amount by which the stock&#;s performance varied from the benchmark. Therefore, if a stock outperforms its benchmark value, its alpha is shown in the positive as a figure that represents the amount by which it beat the market. A negative alpha, on the other hand, shows how much the stock underperformed.

Beta is a measure of volatility in relation to a benchmark, and discussing beta first is actually simpler. Comparing a securities or portfolio&#;s systematic risk to an index like the S&P The beta of many growth equities would be higher than 1, likely much higher. Because T-bill prices are so stable in relation to the market as a whole, their beta would be close to zero. A multiplicative factor, beta.

Alpha and beta in stock market?

What is alpha in stock market investments? It&#;s a ratio used in technical analysis that shows how well a stock has done in relation to a benchmark or market index. The amount by which a company or portfolio has excelled or underperformed relative to the benchmark is known as the alpha percentage, which is sometimes expressed as a simple number such as alpha of 4 or 5, or alpha of A strong stock has a high alpha, and a bad stock may have a low alpha.

Beta coefficient, or simply beta, is a measure of a stock&#;s volatility or relative risk in relation to the performance of the overall market. An investor can gain invaluable knowledge from this measure of volatility on whether a specific investment carries a risk that is higher or lower than the benchmark.

Similar to alpha, beta is likewise stated as straightforward positive and negative numbers. It is also similar to alpha in that it shows how much more volatile a stock is than the market by way of a percentage.

What does alpha mean in investing?

After controlling for erratic variations and market-related volatility, alpha is the excess return on an investment. One of the five main risk management metrics for stocks, bonds, and mutual funds is alpha. It sort of informs investors as to whether an asset has consistently outperformed or underperformed what its beta forecasts.

Risk is also quantified by alpha. An investment was way too risky for the reward if the alpha was A return on an asset that is equal to the risk is indicated by an alpha of zero. After correcting for volatility, an investment that has an alpha larger than zero has done well.

A multiplicative factor, beta. By design, a 2X leveraged S&P ETF has a beta that is very near to 2 in comparison to the S&P In a given time frame, it moves up or down twice as much than the index. If beta is -2, the investment moves by a factor of two in the opposite direction of the index. The majority of investments with negative betas are Treasury bonds or inverse ETFs.

Difference between alpha and beta?

After having a little understanding of the alpha and beta meaning, it is important to understand its difference.

The main distinction between investing in alpha and beta equities is one of purpose. Although they are both technical analysis indicators, each one has a different purpose. Alpha focuses more on the immediate benefits of investing because it shows the degree of a stock&#;s return relative to a particular benchmark. Beta, on the other hand, reveals the systematic risk or volatility connected to a stock.

It is not a matter of which of these two indicators is more beneficial when addressing the subject of what alpha and beta are in stocks. Instead, it depends more on the investor&#;s needs and how he intends to use alpha vs. beta investing to accomplish his financial objectives.

The characteristics of stock returns can be explained using the alpha and beta values. Your stock selection process will take on new dimensions if you comprehend these data.

High alpha stocks are always preferred, but alpha is ephemeral and is quickly arbitraged away. A skilled stock picker is aware of the reasoning behind alpha and knows when to invest in high-alpha stocks depending on the situation.

Alpha-beta and smart beta:

Despite their frightening and complicated sounding names, alpha and beta in share market are just means to quantify risk and return. Before making an investment, both measures may be taken into account, but it&#;s crucial to keep in mind that they are both retroactive. Because an asset&#;s volatility may alter from day to day, historical alpha is not a reliable indicator of success in the future. There are significant differences between beta and alpha. Alpha indicates excess return, whereas beta measures the risk or volatility of an asset.

Another name for beta is the return you can get by passively owning the market. You cannot produce alpha by investing in an index fund that serves as a benchmark.

After understanding what alpha and beta means in stocks, let us now move to smart beta.

Smart beta, a novel method to index investing, has begun to gain popularity among investors in recent years. In order to outperform a benchmark index, smart beta refers to an improved indexing technique that aims to take advantage of specific performance factors. Smart beta is significantly different from a conventional passive indexing strategy in this regard.

Additionally, actively managed mutual funds, in which a fund manager selects certain companies or industries in an effort to outperform a benchmark index, are different from smart beta methods. Smart beta strategies invest in specialized indexes or ETFs based on one or more specified &#;factors&#; in an effort to increase returns, improve diversification, and lower risk. They seek to exceed conventional capitalization-weighted benchmarks or to be less risky than those benchmarks.

Conclusion:

The key traits of different investor classes are defined by the conflict between alpha and beta. Investors are generally concerned of what do alpha and beta mean in investing. A passive investor places a bet on beta and has little faith in the illusive alpha, whereas an active investor places a wager on his capacity to produce the alpha. Who is more competent? That argument goes on forever.

However, the beta and alpha in share market explanation is a better approach to explain stock returns and improves our knowledge of the markets. Understanding these two straightforward measurements can provide us an advantage in the stock markets, even though smart beta and better explanations have emerged as a result of the evolution of portfolio theory.

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