What are alpha and beta, and why are they such important investment concepts?

December 5, 2022

Alpha and beta are two important concepts in investing. Alpha is a measure of an investment’s performance relative to a benchmark index, such as the S&P 500. It represents the excess return on an investment above the return of the benchmark index. For example, if an investment has an alpha of 0.5, it means that it has outperformed the benchmark index by 0.5%.

▸ VIEW FULL MARKET PROFILE PAGE ◂

Beta, on the other hand, is a measure of an investment’s volatility or risk relative to the overall market. It is calculated by dividing the covariance of an investment’s returns with the market by the variance of the market’s returns. A beta of 1 indicates that an investment has the same level of volatility as the market, while a beta greater than 1 indicates that an investment is more volatile than the market, and a beta less than 1 indicates that an investment is less volatile than the market.

Alpha and beta are important investment concepts because they allow investors to evaluate the performance and risk of an investment relative to the market. By understanding an investment’s alpha and beta, investors can determine whether an investment is outperforming or underperforming the market, and whether it is taking on more or less risk than the market. This information can help investors to make informed decisions about their investments and to develop well-diversified portfolios.

“The central idea in The Black Swan is that: rare events cannot be estimated from empirical observation since they are rare.” – Nassim Nicholas Taleb

This website is owned and operated by Investor Unity Pty Ltd (ABN: 90 160 624 331). Any advice included in this website or correspondence is general advice only and is based solely on consideration of the investment or trading merits of the financial products alone, without taking into account the investment objectives, financial situation or particular needs (i.e. financial circumstances) of any particular person. In addition to its internal services, Investor Unity is compensated by brokers and other third parties by way of referral/affiliate and/or general partnership arrangements, via its websites and other communications. Investor Unity is genuinely interested in your long-term trading & investment success. We advise you to take all necessary steps to ensure you have a good understanding of the products & services you’re considering investing in – particularly if they involve leverage. While Investor Unity takes every care to ensure that we only deal with the highest quality services, from throughout the industry, past performance is not a guarantee of future performance. Before making an investment or trading decision based on the general advice, the recipient should carefully consider the appropriateness of the advice in light their financial circumstances and should carefully review the PDS of the relevant financial product as provided by your investment broker. Past results are not a guarantee of future performance. Please contact us, to discuss any questions or concerns you may have- we are here to help.