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Alpha and Beta: The Romulus and Remus Investment Twins
Autor: ethosadvisory :: Views: 177 ::
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Romulus and Remus are the eponym of Rome as Alpha and Beta are the eponym of investing. Romulus and Remus are the mythical twins of Rome; Alpha and Beta are the non-fictional twins of asset management. Story tellers tell us that Romulus and Remus were suckled by a wolf. Analysts tell us that investors get chased by a bull (a lot of "bull") and a bear.
Twins possess sibling personality with individual distinctions. Such is the case for Alpha and Beta. Alpha says, "It's all about me." Alpha goes its own way with selfish interests. Alpha does not care much about the crowd it travels with. Alpha gets measured by unique qualities.
Investment jargon defines Alpha as
A measure of a stocks price fluctuation
Price change/fluctuation reflects corporate earnings increases
Earnings momentum: it's all about money, corporate earnings
Price momentum: a stock or group of stocks increase value above market or index averages
A stock with an alpha of 1.10 may increase 10% annually above the broad market
Ever play "Where's Waldo?" Finding Alpha is the same. Analysts love the search. Waldo hides in a maze of images. Stocks with alpha potential hide within a stock index. Essentially, a money manager must identify alpha, buy the stock, and sell it before it loses its alpha momentum. None too easy!
Beta is the other twin. Much more sensitive than Alpha. A stock with a high beta becomes downright indignant and emotional. A beta of 1.5 means the stock price will fluctuate 50% more than a market index. A stock with a low beta possesses a reserved nature. It just follows the crowd.
Investment jargon defines Beta as
Beta measures a stocks up or down movement against a family or index of stocks
Low beta suggests low risk, and high beta says, "I'm emotional or volatile."
Beta likes company; it finds relevance in a group of stocks rather than by itself.
Portfolios with high beta have more risk
Seems to me that Alpha is the first born of this pair. Alpha exhibits self-confidence and self-assurance. Alpha likes bucking the trend; Beta seems to either get upset or bored. Despite such eccentricities the Romulus and Remus investment twins do what they are made to do: they measure stock and portfolio risk and return.
"Never spend your money before you have it." - Thomas Jefferson, 3rd president of US (1743 - 1826)
Source: Free Articles
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