tejas.gaikwad.1044
Tejas Gaikwad
Alpha is one of five technical risk ratios; the others are beta, standard deviation, R-squared, and the Sharpe ratio. These are all statistical measurements used in modern portfolio theory (MPT). All of these indicators are intended to help investors determine the risk-reward profile of a mutual fund. Simply stated, alpha is often considered to represent the value that a portfolio manager adds to or subtracts from a fund's return.
A positive alpha of 1.0 means the fund has outperformed its benchmark index by 1%. Correspondingly, a similar negative alpha would indicate an under-performance of 1%.
The concept and focus on Alpha comes from an observation increasingly made during the middle of the twentieth century, that around 75 percent of stock investment managers did not make as much money picking investments as someone who simply invested in every stock in proportion to the weight it occupied in the overall market in terms of market capitalization, or indexing. Many academics felt that this was due to the stock market being "efficient" which means that since so many people were paying attention to the stock market all the time, the prices of stocks rapidly moved to the correct price at any one moment, and that only random variation beyond the control of the manager made it possible for one manager to achieve better results than another, before fees or taxes were considered.
A belief in efficient markets spawned the creation of market capitalization weighted index funds that seek to replicate the performance of investing in an entire market in the weights that each of the equity securities comprises in the overall market. The best examples for the US are the S&P 500 and the Wilshire 5000 which approximately represent the 500 most widely held equities and the largest 5000 securities respectively, accounting for approximately 80%+ and 99%+ of the total market capitalization of the US market as a whole.
In fact, to many investors,[citation needed] this phenomenon created a new standard of performance that must be matched: an investment manager should not only avoid losing money for the client and should make a certain amount of money, but in fact should make more money than the passive strategy of investing in everything equally (since this strategy appeared to be statistically more likely to be successful than the strategy of any one investment manager). The name for the additional return above the expected return of the beta adjusted return of the market is called "Alpha".
Alpha is a risk-adjusted measure of the so-called active return on an investment. It is the return in excess of the compensation for the risk borne, and thus commonly used to assess active managers' performances. Often, the return of a benchmark is subtracted in order to consider relative performance, which yields Jensen's alpha.
It can be shown that in an efficient market, the expected value of the alpha coefficient is zero.
For instance, although a return of 20% may appear good, the investment can still have a negative alpha if it's involved in an excessively risky position.
Alpha is used to evaluate the return on an investment, it is a measure of the risk-adjusted return on an investment i.e. it is a measure of the return after compensating for the risk involved.
It is the intercept of the Security Market Line (SML) and thus it conveys the performance of an investment compensating for the risk involved.
A positive alpha of 1.0 means the fund has outperformed its benchmark index by 1%. Correspondingly, a similar negative alpha would indicate an under-performance of 1%.
The concept and focus on Alpha comes from an observation increasingly made during the middle of the twentieth century, that around 75 percent of stock investment managers did not make as much money picking investments as someone who simply invested in every stock in proportion to the weight it occupied in the overall market in terms of market capitalization, or indexing. Many academics felt that this was due to the stock market being "efficient" which means that since so many people were paying attention to the stock market all the time, the prices of stocks rapidly moved to the correct price at any one moment, and that only random variation beyond the control of the manager made it possible for one manager to achieve better results than another, before fees or taxes were considered.
A belief in efficient markets spawned the creation of market capitalization weighted index funds that seek to replicate the performance of investing in an entire market in the weights that each of the equity securities comprises in the overall market. The best examples for the US are the S&P 500 and the Wilshire 5000 which approximately represent the 500 most widely held equities and the largest 5000 securities respectively, accounting for approximately 80%+ and 99%+ of the total market capitalization of the US market as a whole.
In fact, to many investors,[citation needed] this phenomenon created a new standard of performance that must be matched: an investment manager should not only avoid losing money for the client and should make a certain amount of money, but in fact should make more money than the passive strategy of investing in everything equally (since this strategy appeared to be statistically more likely to be successful than the strategy of any one investment manager). The name for the additional return above the expected return of the beta adjusted return of the market is called "Alpha".
Alpha is a risk-adjusted measure of the so-called active return on an investment. It is the return in excess of the compensation for the risk borne, and thus commonly used to assess active managers' performances. Often, the return of a benchmark is subtracted in order to consider relative performance, which yields Jensen's alpha.
It can be shown that in an efficient market, the expected value of the alpha coefficient is zero.
For instance, although a return of 20% may appear good, the investment can still have a negative alpha if it's involved in an excessively risky position.
Alpha is used to evaluate the return on an investment, it is a measure of the risk-adjusted return on an investment i.e. it is a measure of the return after compensating for the risk involved.
It is the intercept of the Security Market Line (SML) and thus it conveys the performance of an investment compensating for the risk involved.