Synonyms for investment alpha

Please say to him that a client wishes to speak to him regarding an investment. It is the intercept of the security characteristic line SCL , that is, the coefficient of the constant in a market model regression. Your Practice.

Alpha is a measure of the active return on an investmentthe performance of that investment compared with a suitable market index. Alpha, along with betais one of two key coefficients in the capital asset pricing model used in modern portfolio theory and is closely related to other important quantities such as standard deviationR-squared and the Sharpe ratio. In modern financial markets, where index funds are widely available for purchase, alpha is commonly used to judge the performance of mutual funds and similar investments. As these funds include various fees normally expressed in percent terms, the fund has to maintain an alpha greater than its fees in order to provide positive gains compared with an index fund. Historically, the vast majority of traditional funds have had negative alphas, which has led to synonyms for investment alpha flight of capital to index funds and non-traditional hedge funds. It is also possible to analyze a portfolio of investments and calculate a theoretical performance, most commonly using the capital asset pricing model CAPM.

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Alpha is a measure of the active return on an investmentthe performance of that investment compared with a suitable market index. Alpha, along with betais one of two key coefficients in the capital asset pricing model used in modern portfolio theory and is closely related to other important quantities such as standard deviationR-squared and the Sharpe ratio.

In modern financial markets, where index funds are widely available for purchase, alpha is commonly used to judge the performance of mutual funds and similar investments. As these funds include various fees normally expressed in percent terms, the fund has to maintain an alpha greater than its fees in order to provide positive gains compared with an index fund. Historically, the vast majority of traditional funds have had negative alphas, which has led to a flight of capital to index funds and non-traditional hedge funds.

It is also possible to analyze a portfolio of investments and calculate a theoretical performance, most commonly using the capital asset pricing model CAPM. Returns on that portfolio can be compared with the theoretical returns, in which case the measure is known as Jensen’s alpha. This is useful for non-traditional or highly focused funds, where a single stock index might not be representative of the investment’s holdings.

It is the intercept of the security characteristic line SCLthat is, the coefficient of the constant in a market model regression.

It can be shown that in an efficient marketthe expected value of the alpha coefficient is zero. Therefore, the alpha coefficient indicates how an investment has performed after accounting for the risk it involved:. In this context, because returns are being compared with the theoretical return of CAPM and not to a market index, it would be more accurate to use the term of Jensen’s alpha. A belief in efficient markets spawned the creation of market capitalization weighted index funds that seek to replicate the performance of investing in an entire market in the weights that each of the equity securities comprises in the overall market.

In fact, to many investors, [ citation needed ] this phenomenon created a new standard of performance that must be matched: an investment manager should not only avoid losing money for the client and should make a certain amount of money, but in fact should make more money than the passive strategy of investing in everything equally since this strategy appeared to be statistically more likely to be successful than the strategy of any one investment manager.

The name for the additional return above the expected return of the beta adjusted return of the market is called «Alpha».

Besides an investment manager simply making more money than a passive strategy, there is another issue: although the strategy of investing in every stock appeared to perform better than 75 percent of investment managers see index fundthe price of the stock market as a whole fluctuates up and down, and could be on a downward decline for many years before returning to its previous price. The passive strategy appeared to generate the market-beating return over periods of 10 years or.

This strategy may be risky for those who feel they might need to withdraw their money before a year holding period, for example. Thus investment managers who employ a strategy which is less likely to lose money in a particular year are often chosen by those investors who feel that they might need to withdraw their money sooner.

Investors can use both alpha and beta to judge a manager’s performance. If the manager has had a high alpha, but also a high beta, investors might not find that acceptable, because of the chance they might have to withdraw their money when the investment is doing poorly.

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The Information Ratio Helps Measure Portfolio Performance The information ratio IR measures portfolio returns and indicates a portfolio manager’s ability to generate excess returns relative to a given benchmark. Common stock Golden share Preferred stock Restricted stock Tracking stock. The rents are low and do not pay regular interest on the investment. Some references to alpha may refer to a more advanced technique. Please help invesgment this article by adding citations to reliable sources. It is the intercept of the security characteristic line SCLthat is, the coefficient of the constant in a market model regression. In other words, alpha is hard to symonyms by, especially after taxes and fees. Aggregate Index and for a relatively low risk with a standard deviation of 4. Quality Dividend Growth Synonyms for investment alpha. It tracks a customized index called the Bloomberg Barclays U. The offers that appear in this table are from partnerships from which Investopedia receives compensation. Synonyms for investment asset contribution expenditure expense finance financing grant loan money property purchase stake transaction venture advance ante backing bail endowment flutter hunch inside interests investing piece plunge spec speculation stab smart money vested interests MOST RELEVANT. This is why risk-return metrics are important to consider in conjunction with alpha.