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Alpha

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Alpha
Extra return on an asset compared with its required rate of return.
    
Investment managers often explain what they do with the help of two Greek letters, Alpha and Beta. These are used to describe the two main risks inherent in investing in stocks.
    
Alpha relates to factors affecting the performance of an individual stock .or the manager's skill in selecting a particular stock. Beta relates to market risks, or, more specifically, the relative behaviour of stocks. Beta is therefore a measure of how sensitive the price of a specific stock is to changes in the price of the stock market. In other words, a Beta-neutral Portfolio should be insensitive to swings in the stock market; it would be hedged.
    
A stock's Alpha is determined by measuring the difference between an asset's actual return and its expected performance given its level of Market risk as measured by Beta. An Alpha of 1.0 means the asset's return is 1% higher than its Beta would predict. An Alpha of - 1.0 means it's 1% lower.
    
The accuracy of an Alpha rating depends on two factors: first, the assumption that Market risk, as measured by Beta, is the only Risk measure necessary; and second, the extent of a stock's Correlation to a chosen Benchmark.
Posted by  IBC Conferences
 
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