All that you want to know about - Alpha & Beta

Alpha and Beta are terms that come up often in discussions on investments. Yogita Loke explains you the significance of two vital terms

What is Alpha & Beta?
Alpha indicates the excess return of the fund above risk adjusted market return, given its level of risk as measured by Beta. The excess return of the fund over its benchmark index is a fund’s Alpha.

Beta is the measure of the volatility of a security or a portfolio as compared to the market as a whole. It is also known as beta coefficient.

What do both signify to the investors?
An investment with a positive Alpha indicates that the fund has performed better than its benchmark and a negative Alpha indicates that the fund has underperformed its benchmark.
A Beta of one indicates that the volatility of the portfolio will reflect the market volatility exactly. A Beta of less than one indicates that the volatility of portfolio is less than the market volatility while a Beta of more than one signifies that the volatility of portfolio is greater than the market.

For example, if a stock's Beta is 1.2, theoretically it means that the stock is 20 per cent more volatile than the market.

Why these ratios are considered important?

Alpha value is important to your investor because it measures the excess returns a fund has generated in relation to the returns generated by its benchmark. Alpha is used to determine whether the fund manager through his stock selection ability has been able to beat the market.

Beta value gives you an idea of how a fund will move in relation to the market volatility. In simple words, it is a statistical measure that shows how sensitive a fund is to the market movements. If the Sensex moves up by 10 per cent, a fund's Beta number will help your investor to gauge the fund's movement in relation to the sensex.

Source: http://cafemutual.com/News/InnerKnowledge.aspx?srno=57&MainType=Tutorials&id=5