alpha beta how are the two used to evaluate a stock's performance
hello i'm rachel and you're watching cal kind media in today's video we're going to demystify
the concept of alpha versus beta and how these two can be used to evaluate a stock's performance
alpha and beta are two commonly used terms in the stock market investors and traders use the two key
measurements to evaluate the historic performance of a stock fund or an investment portfolio while
alpha is used to analyze the performance of a stock in comparison to a benchmark index
beta shows the volatility level of a stock price compared to the overall market a high rating of
alpha is considered good by investors and traders on the other hand a high beta may be preferred by
an investor in growth stocks it is though disliked by investors seeking steady returns and lower risk
now let us understand the key differences between alpha and beta alpha is generally represented in
the form of a number in financial reports or pink dailies either it is a positive number
or a negative number now what does that mean well the number indicates the percentage above or below
a benchmark index that the stock or fund price achieved a reading of four indicates that the
stock or the fund did four percent better than the index a negative reading of five percent would
mean that the index faired five percent worse than the index in case of an investment an alpha of
two would mean that the investment outperforms its benchmark index by two percent a negative
reading of two would mean the investment underperformed its benchmark index by two percent
a zero alpha means that the stock return matched the benchmark index being an historical number
alpha can only track a stock's performance over time it cannot estimate its future performance
therefore individual investors can gauge how a stock or fund may perform with respect to
its peers or the overall market professional portfolio managers use a capital asset pricing
model to estimate the potential returns of an investment portfolio in the case of an
investment portfolio earning just four percent that's despite the capital asset pricing model
analysis indicating a five percent return based on risk the alpha would be minus one percent now for
the key takeaways investment managers focus on diversifying their investment portfolios
to generate higher alpha alpha represents the value a portfolio manager adds or subtracts
from a fund's return on the other hand as we have already discussed beta indicates the volatility of
a stock fund or a stock portfolio compared to the overall market the measurement is used by
investors to know about the volatility associated with a stock it gives them an idea if the stock is
worth the risk to invest beta has a baseline of number one it shows that the stock's price moves
exactly in the same direction as the market a beta of less than one indicates that the stock is
less volatile in the market and vice versa in the case of a reading of 1.5 percent the stock
is said to be 50 more volatile in the market beta is also a historical number and does not help to
predict a stock's future performance tech stocks are known to give higher returns to investors but
they do come with more risks meanwhile investors with lower risk-taking potential such as retirees
who seek steady income go for stocks with lower beta on the other hand risk tolerant investors
seeking higher returns generally invest in higher beta stocks well thank you for watching i hope
this has given you some insights to the concept of alpha versus beta if you like this video please
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insights and information on the markets and beyond i'm rachel signing off for kalkine media