explain alpha, beta, gamma rays
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An alpha of 1.0 means the mutual fund or investment outperformed its benchmark index by 1 percent. Conversely, an alpha of -1.0 means the mutual fund or investment underperformed its benchmark index by 1%.
Alpha Examples
For example, an 8% return on a mutual fund is impressive when equity markets as a whole are returning 4%, but it's far less impressive when the broader market is earning 15%. Alpha takes into account the overall market's performance to give investors a more accurate picture of an investment's performance.
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Alpha is used in finance as a measure of performance. Alpha, often considered the active return on an investment, gauges the performance of an investment against a market index or benchmark which is considered to represent the market’s movement as a whole. The excess return of an investment relative to the return of a benchmark index is the investment’s alpha.
Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Beta is used in the capital asset pricing model (CAPM), which calculates the expected return of an asset based on its beta and expected market returns. Beta is also known as the beta coefficient.
Alpha and beta are used together by investment managers to calculate, compare, and analyze returns. They are two of the five standard technical risk calculations, the other three being the standard deviation, R-squared, and the Sharpe ratio.
Alpha
Alpha is perceived as a measurement of a portfolio manager's performance. Alpha is used for mutual funds and all types of investments. It's often represented as a single number (like 3 or -5), but this refers to a percentage measuring how the portfolio or fund performed compared to a benchmark index (i.e., 3% better or 5% worse).
In short, an alpha of 1.0 means the mutual fund or investment outperformed its benchmark index by 1 percent. Conversely, an alpha of -1.0 means the mutual fund or investment underperformed its benchmark index by 1%.
Alpha Examples
For example, an 8% return on a mutual fund is impressive when equity markets as a whole are returning 4%, but it's far less impressive when the broader market is earning 15%. Alpha takes into account the overall market's performance to give investors a more accurate picture of an investment's performance.
If a capital asset pricing model (CAPM) analysis indicates that the portfolio should have earned 5% (based on risk, economic conditions, and other factors), but instead earned only 3%, then the alpha of the portfolio would be -2%. In CAPM, alpha is the rate of return that exceeds what the model predicted. Investors generally prefer an investment with a high alpha.
Formula for Alpha:
By comparing an investment to a benchmark's performance, we can determine how much the portfolio manager has added to the investment's return. In short, alpha is the return on an investment that is not a result of general movement in the greater market.
Portfolio managers seek to generate alpha in diversified portfolios with diversification intended to eliminate unsystematic risk. Because alpha represents the performance of a portfolio relative to a benchmark, it represents the value that a portfolio manager adds to or subtracts from a fund's return. As such, an alpha of zero would indicate that the portfolio or fund is tracking perfectly with the benchmark index and that the manager has not added or lost any value. (For more, you can also read "A Deeper Look at Alpha.")
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Beta
Beta is a measure used in fundamental analysis to determine the volatility of an asset or portfolio in relation to the overall market. Beta is often used as a risk-reward measure meaning it helps investors determine how much risk their willing to take to achieve the return for taking on that risk. A stock's price variability is important to consider when assessing risk. If you think of risk as the possibility of a stock losing its value, beta has appeal as a proxy for risk.
The baseline number for alpha is zero (investment performed exactly to market expectations), but the baseline number for beta is one. A beta of one is an indication that the security's price moves exactly as the market moves.
GAMMA RAY
Penetrating electromagnetic radiation of a kind arising from the radioactive decay of atomic nuclei.
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