Alpha vs. Beta In Investing: What’s The Difference?
Investing is one of the most common ways of generating wealth, but how can investors ensure they make the right decisions? The phrases Alpha and Beta are two commonly used measures when making decisions when investing. But what do these two concepts mean and how do they differ? In this article, we’ll look at the meaning and differences between Alpha and Beta in investing.
What Is Alpha?
Alpha, also referred to as “Alpha”, is a measure of performance that takes into account the risk present in any portfolio. Alpha is used to determine how a portfolio performs relative to the markets that portfolio is invested in. It measures the portfolio’s return in comparison to the risk-free rate, which is the rate of return on an investment strategy with no risk.
Essentially, Alpha measures the amount of return an investor can expect on the portfolio over time, taking into account the risks taken when investing. It is often expressed as a percentage, so that investors can compare a strategy to another. A positive Alpha means that the portfolio’s return is greater than the market’s return, while a negative Alpha indicates that the portfolio’s return is lower than that of the market it is invested in.
What Is Beta?
Beta is a measure of stock or portfolio risk relative to that of the overall market, and it is expressed as a number. A Beta of one (1) indicates that the stock is as volatile as the market. A Beta greater than one (1) indicates that the stock or portfolio is more volatile than the market, while a Beta lower than one (1) indicates that the stock or portfolio is less volatile than the market.
For example, if a stock has a Beta of 1.25, it would be 25% more volatile than the overall market. Investors may find these stocks attractive because they have the potential for greater returns, however, the downside is that these stocks are also likely to experience greater losses in a market downturn.
Difference Between Alpha and Beta
Alpha and Beta are both ways of determining risk and return, however, they are fundamentally different concepts. Alpha is used to measure the performance of a portfolio relative to the market, while Beta is a measure of stock or portfolio volatility relative to the market.
Alpha measures the performance of an investment or portfolio relative to how much risk the investor has taken, while Beta measures the level of risk an individual security or portfolio carries, compared to the market. Alpha measures performance relative to the level of risk taken on, while Beta measures the volatility of an investment.
Alpha is used to measure the return on the portfolio over time, while Beta measures the risk of a stock or portfolio in comparison to the overall stock market. While Alpha helps to measure the portfolio’s performance in comparison to the market, Beta helps investors measure the portfolio’s risk relative to the market.
Alpha and Beta are two important measurements for investors to consider. Alpha measures the performance of the portfolio relative to the market, while Beta measures the risk of a stock or portfolio relative to the market. Neither measure is a perfect representation of the performance of an investment or the risk of the stock portfolio, as both take into account the risk taken when investing. However, Alpha and Beta provide investors with a helpful baseline to assess their portfolios and make informed investment decisions.
