Alphas and Betas in Investments

There has been a lot of garboils among the investment community due to the sharp speculations and precipitations in the stock indices since last fortnight. At this stage better indicants and forecasters will be a succor to the distressed investors. Sometime this week I noticed in the daily that is profitable to investors especially… There are some parameters that help lucrative investors to reap their goal… Two pivotal factors which gauge the productivity of a stock are the Alpha and Beta values…. These are used for forecasting and decision making by Portfolio Managers and Investment Bankers.

Beta value is specifically an indicant whose value hints the risk involved with the stock in comparison with the market risk. If equal to one indicating that the risk with the stock is same as that with the market. And if greater than one telling that stock risk is more than market risk and vice versa. This parameter portends the impending risks involved with the stock. Typical examples of High Beta stocks will be Metals and Oil stocks where in the risks involved will be more and that of Low Beta stocks will be Pharmaceuticals and FMCG.

Coming to Alpha factor, its value specifically measures the excess return made in by the stock than the return predicted by the Capital Asset pricing model for a given Beta. If greater than indicating that the stock has out performed market expectations and vice versa. It is calculated as the difference between the excess return made than the return made over risk free return. Typical examples of High Alpha stocks will be engineering stocks and Power stocks and that of Low Alpha will be Oil stocks and Power.

So as a prudent investor, one should choose stocks with High Alpha for a given Beta based on his/her own risk appetites. These values can be obtained form your own investment banker. And always as the market jargon goes “High Risk, High Gains”, taking higher Beta and Alpha is all set to rain money, but beware the risk should always be a calculated one.


PS: My intention is not to transform the reader into investment behemoths but only to ameliorate their financial cognizance.