There are two key evaluators for measuring stock, fund, and investment portfolio performances. They are alpha and beta. Alpha, as one of the evaluators calculates the returned investment amount in comparison to the market index. In other words, it is compared to other broad benchmarks. Beta on the other hand measures volatility of an investment. It is an indication of investment relative risk. Among many measurements like standard deviation, R-squared, and the Sharpe ratio, alpha and beta are two of them. They evaluate an investment portfolio returns.
The figure of alpha in a stock represents a single number such as 3 or -5. On the other hand, the number refers to the percentage of above and below benchmark index of the achieved stock or fund price. It means that the stock or fund is 3% better and 5% worse respectively compared to the index. In this scenario, if the alpha represents 1.0, it means that the investment is outperformed. The outperformance is therefore 1% of the benchmark index. Therefore an alpha of -1.0 would say that the investment is under performing its benchmark index by 1%. In other words, when the alpha is zero, the return would be the same with the benchmark.
Basically, alpha helps individual investors to know how a stock or fund performs in relation to its peers and the market. Professional portfolio managers utilize alpha for the rate of return exceeding the model’s prediction or comes short of it. Commonly they project the potential returns in the investment portfolio by using capital asset pricing model (CAPM).
