To the investors out there, is alpha something you look for when investing in a portfolio? What is your view on alpha? PA
Alpha is a measure of an excess return. It's really very important. Every portfolio manager should set a goal to earn a large alpha.
Thank you for providing the definition of Alpha to clarify my question. So, what is your view on Alpha? Is it a good measure? Does it reflect the risk in the underlying portfolio? Is it really just a marketing gimmick to get investors to invest in funds that may not be doing too well relatively to S&P but is doing a bit better than benchmark? Let's go deep into this! PA
You claim to be a Pension Administrator, but you don't know what alpha is? And you cannot find its meaning? I found the meaning after a 20 second google search Sad. Really Sad...
TraderZones, I am sad about 2 things: 1) I never asked for the definition on Alpha. While I am glad that someone provided a definition to clarify my question, I am yet sad to see the content of your post and of you jumping to the conclusion. It wouldn't matter if someone else post it, but you have always provided good posts with a lot of good trading advices and I really respect you for that. Seeing this response really disappointed me. 2) I am not a pension administrator, nor are you a Trader Zones. I think it's pretty silly to think someone actually post what they do on their nick name. It's sad to know a respected poster actually think I am a pension administrator. Anyway, if you know what a pension administrator do, you know it's very clerical and administrative. The pension committee are the ones who are responsible for governing the pension fund and they are expected to have knowledge on funds and investments, not an administrator. PA
A measure of performance on a risk-adjusted basis. Alpha takes the volatility (price risk) of a mutual fund and compares its risk-adjusted performance to a benchmark index. The excess return of the fund relative to the return of the benchmark index is a fund's alpha. 2. The abnormal rate of return on a security or portfolio in excess of what would be predicted by an equilibrium model like the capital asset pricing model (CAPM). 1. Alpha is one of five technical risk ratios; the others are beta, standard deviation, R-squared, and the Sharpe ratio. These are all statistical measurements used in modern portfolio theory (MPT). All of these indicators are intended to help investors determine the risk-reward profile of a mutual fund. Simply stated, alpha is often considered to represent the value that a portfolio manager adds to or subtracts from a fund's return. A positive alpha of 1.0 means the fund has outperformed its benchmark index by 1%. Correspondingly, a similar negative alpha would indicate an underperformance of 1%. 2. If a CAPM analysis estimates that a portfolio should earn 10% based on the risk of the portfolio but the portfolio actually earns 15%, the portfolio's alpha would be 5%. This 5% is the excess return over what was predicted in the CAPM model. Here is the full definition of alpha as a measure of success. I use it to measure the effectiveness of the portfolio. Since alpha is greater than 1.0 your're outperforming the benchmark. The greater the alpha, the better.
Since alpha is a measure of yield in relation to benchmark, beta is the measure of risk in comparison to the market. If you sustain your beta less than 1 and alpha more than 1 for more than 2+ years, you're a genius.
Theoretically speaking, if a portfolio manager is losing money on his/her fund, yet outperformed the S&P, he/she is said to generated Alpha and is a good portfolio manager. My view is that when a fund is being invested, it is expected not to lose money, especially ones being managed and management fee is being collected. IMHO, Alpha is good for measuring how well a portfolio do relatively to the benchmark, but to the investors, it does not disclose the true risk involve, even if beta is considered. PA