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What is Alpha?


"coefficient measuring the portion of an investment’s return arising from specific (nonmarket) risk. In other words, alpha is a mathematical estimate of the amount of return expected from an investment’s inherent values, such as the rate of growth in earnings per share. It is distinct from the amount of return caused by volatility, which is measured by the beta coefficient. For example, an alpha of 1.25 indicates that a stock is projected to rise 25% in price in a year when the return on the market and the stock’s beta are both zero. An investment whose price is low relative to its alpha is undervalued and considered a good selection."

ALPHA. (2006). In Dictionary of Finance and Investment Terms.

What is a BETA?


"coefficient is the covariance of a stock or portfolio in relation to the rest of the stock market. The Standard & Poor’s 500 Stock Index has a beta coefficient of 1. Any stock or portfolio with a higher beta is more volatile than the market, and any with a lower beta can be expected to rise and fall more slowly than the market. A conservative investor whose main concern is preservation of capital should focus on stocks with low betas, whereas one willing to take high risks in an effort to earn high rewards should look for high-beta stocks"

BETA. (2006). In Dictionary of Finance and Investment Terms.