Scribd Logo
Upload

Welcome to Scribd!

  • 33 views

    Alpha (Investment) : Origin of The Concept

    Uploaded by

    domomwambi
    Alpha is a measure of risk-adjusted return on an investment in excess of the market return. It measures whether an investment has outperformed a market index given the amount of risk taken on. An alpha of zero means the investment performed as well as expected given its market risk. A positive alpha means it outperformed expectations, while a negative alpha means it underperformed expectations. The concept of alpha originated from observations that most investment managers did not outperform the overall stock market index. It provides a way to judge whether active managers have added value over a passive index fund approach.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd

    Alpha (Investment) : Origin of The Concept

    Uploaded by

    domomwambi
    33 views3 pages
    Alpha is a measure of risk-adjusted return on an investment in excess of the market return. It measures whether an investment has outperformed a market index given the amount of risk taken on. An alpha of zero means the investment performed as well as expected given its market risk. A positive alpha means it outperformed expectations, while a negative alpha means it underperformed expectations. The concept of alpha originated from observations that most investment managers did not outperform the overall stock market index. It provides a way to judge whether active managers have added value over a passive index fund approach.

    Original Description:

    AA

    Original Title

    Alpha

    Copyright

    © © All Rights Reserved

    Available Formats

    PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    Alpha is a measure of risk-adjusted return on an investment in excess of the market return. It measures whether an investment has outperformed a market index given the amount of risk taken on. An alpha of zero means the investment performed as well as expected given its market risk. A positive alpha means it outperformed expectations, while a negative alpha means it underperformed expectations. The concept of alpha originated from observations that most investment managers did not outperform the overall stock market index. It provides a way to judge whether active managers have added value over a passive index fund approach.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    33 views3 pages

    Alpha (Investment) : Origin of The Concept

    Uploaded by

    domomwambi
    Alpha is a measure of risk-adjusted return on an investment in excess of the market return. It measures whether an investment has outperformed a market index given the amount of risk taken on. An alpha of zero means the investment performed as well as expected given its market risk. A positive alpha means it outperformed expectations, while a negative alpha means it underperformed expectations. The concept of alpha originated from observations that most investment managers did not outperform the overall stock market index. It provides a way to judge whether active managers have added value over a passive index fund approach.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    You are on page 1of 3

    Alpha (investment)

    1
    Alpha (investment)
    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.
    The alpha coefficient ( ) is a parameter in the capital asset pricing model (CAPM). It is the intercept of the
    security characteristic line (SCL), that is, the coefficient of the constant in a market model regression.
    It can be shown that in an efficient market, the expected value of the alpha coefficient is zero. Therefore the alpha
    coefficient indicates how an investment has performed after accounting for the risk it involved:
    : the investment has earned too little for its risk (or, was too risky for the return)
    : the investment has earned a return adequate for the risk taken
    : the investment has a return in excess of the reward for the assumed risk
    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.
    Origin of the concept
    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, 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 (investment)
    2
    Relation to beta
    Besides an investment manager simply making more money than a passive strategy, there is another issue: Although
    the strategy of investing in every stock appeared to perform better than 75 percent of investment managers, the price
    of the stock market as a whole fluctuates up and down, and could be on a downward decline for many years before
    returning to its previous price.
    The passive strategy appeared to generate the market-beating return over periods of 10 years or more. This strategy
    may be risky for those who feel they might need to withdraw their money before a 10-year holding period, for
    example. Thus investment managers who employ a strategy which is less likely to lose money in a particular year are
    often chosen by those investors who feel that they might need to withdraw their money sooner.
    Investors can use both alpha and beta to judge a manager's performance. If the manager has had a high alpha, but
    also a high beta, investors might not find that acceptable, because of the chance they might have to withdraw their
    money when the investment is doing poorly.
    These concepts not only apply to investment managers, but to any kind of investment.
    References
    Further reading
    Bruce J. Feibel. Investment Performance Measurement. New York: Wiley, 2003. ISBN 0-471-26849-6
    External links
    International Association of CPAs, Attorneys, and Management (IACAM) (Free Business Valuation E-Book
    Guidebook) (http:/ / www. businessvaluation. us)
    The financial-dictionary entry on alpha (http:/ / financial-dictionary. thefreedictionary. com/ Alpha)
    Investopedia Alpha Definition (http:/ / www. investopedia. com/ terms/ a/ alpha. asp)
    Five Technical Risk Ratios (http:/ / www. forexbasecamp. com/ advanced-forex-concepts/
    five-technical-risk-ratios-in-forex-trading)
    Article Sources and Contributors
    3
    Article Sources and Contributors
    Alpha (investment) Source: http://en.wikipedia.org/w/index.php?oldid=523389400 Contributors: Ajcdb, Andy M. Wang, Arthena, Black Swan01, CarrotMan, Dennytripp, DocendoDiscimus,
    Dreambeaver, Edward, Feco, Feibels, Gary King, Gilkitay, GregorB, Henrygb, Ianneub, Jamesday, Jaxhere, Jeffrey Mall, JohnDoe0007, Jplyon, Jujutacular, Lamro, MER-C, Mitchitara,
    Nobellaureatesphotographer, Octopus-Hands, Pearle, Pgreenfinch, Psychicfriend, Quaeler, RJFJR, RobertC, Saxifrage, Shawnc, Shomroni, Tejblum, TelecomNut, UnitedStatesian, Yworo,
    Zfeinst, Zoz, 63 anonymous edits
    License
    Creative Commons Attribution-Share Alike 3.0 Unported
    //creativecommons.org/licenses/by-sa/3.0/

    You might also like

    pFad - Phonifier reborn

    Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

    Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


    Alternative Proxies:

    Alternative Proxy

    pFad Proxy

    pFad v3 Proxy

    pFad v4 Proxy