alpharisk This is a topic that many people are looking for. thetruthaboutdow.org is a channel providing useful information about learning, life, digital marketing and online courses …. it will help you have an overview and solid multi-faceted knowledge . Today, thetruthaboutdow.org would like to introduce to you What is Alpha and Beta Risk? Alpha vs Beta as Investment Risk Ratios Investing for Beginners. Following along are instructions in the video below:
“To your new investment academy. There s a whole lot of neutral funds are available available in the market. How do you know. Which one of them is good how separate out the out performers from the average.
One. The answer is you should be able to read performance of funds. There are certain terms. Which help us do that standard deviations one of such terms which we have studied in one of our earlier videos and in this video.
We are going to study two more such terms called as alpha and beta standard. Deviation indicates. What would be the fund performance in correlation with its mean. That is for example.
If there is a fun with average returns of around 18 and standard deviation of 12. This indicates when the markets rise this particular fund could make returns of around 30 and when the markets plunge. The returns could go down as lower. 6.
The standard deviation tells us what would be the fund performance in correlation with its mean. What does beta. Tell you is what would be the fun performance in correlation with an index now this index that the fund correlates to cannot just be any index cannot just be sensex or nifty. Because nifty is made of 50 stocks.
Sensex is made of just 30 stocks now a fund could hold stocks which do not form the sensex or the nifty from the objective of a fund. You may know. What is the investment strategy for example large cap funds invest. Only into large cap stocks.
There is an index called as s. P. Bse. 200.
Which is tracts large cap stocks so. Such funds could correlate to this index similarly small cap funds. Invest. Only into small cap.
Stocks does. An index called as s p. Bse. Small cap such funds could relate to this index so don t worry you don t have to find out the index your fund correlates to because such data is readily available in fun sheetz on various investment sites.
Etc. Now what we need to understand is what is the beta value of our fund and correlation with the index and what does it imply let us understand beta with the help of an example let us assume. There is a fund up called a this is a large cap fund and has a beta value of 11. Since it is a large cap fund it relates to the index s p.
Beta value of indices is always taken as 1 now what does this beta value of 11. Imply. It implies. That whenever s.
P. Bse. 200. Moves up by 10 fund.
A moves up by 11. And whenever. This index moves down by 10 fund. A moves down by 11.
You can multiply the index performance with the beta value of the fund to find out what would be the fund performance. Now what we saw in numbers. Here this graph is just a representation of that the white dotted line shows performance of fund. A whereas.
The pink line shows performance of the index snp bsc. 200 let us assume this another fancy with a beta value of 09. Whenever a fun as the case of fund. A has a beta value greater than 1.
It indicates that this particular fund would make more gains when the index rises..
And it will even fall more make more loss than the index when the index falls and whenever the beta value of a fund as the case of funds. See is lesser than 1. It implies that this particular fund would gain less than the index then the index moves up and it will even fall lesser than the index when the index moves down now what you could conclude from these examples is that the fund. A is more sensitive than the index also means that a slightly more riskier than the index and fancy is more stable or less sensitive than the index now just a reminder after studying beta that none of the performance parameters should be seen into isolation.
They should be seen together to evaluate whether you should go for a particular fund or know a higher beta value indicates that a certain fund would gain more than the index in a bull market. And it would fall more in a bear market. Now if a fund is taking higher risk. It would be justified.
Only if it produces higher returns. And this can be validated with the help of alpha. Let us take an example to understand alpha. Better let us.
Assume this is fund with a beta value of 12. Now this indicates for 10 rise in the index. It correlates to there would be 12 percent rise in the fund. Now.
This is a predicted value but in real this fund gains. 15. So an alpha is nothing. But the actual gained minus the one predicted by the beta value now many times.
People think that alpha is the value of returns generated over the return generated by the market..
That is if we correlate to the example that we just saw if the market is producing 10 returns. And there is a fund with the alpha value of 3 people assume that the returns made by the fund at 13. But this is not true the fund has actually generated 15 of returns. That is the alpha indicates.
The return generated in correlation with the beta value that is the predicted return of the fund. So alpha generated by a fund is the value added by the fund manager to the fund as the alpha gain is not due to the general market movement. But due to the decisions. Made by the fund manager.
Now there could be situations. When the alpha is negative. It indicates that the fund has underperformed than what was expected from it now one time alpha cannot make a fund and exceptional fund. The fund has to consistently generate alpha to establish itself as a fun.
Which generates good returns. Friends hope. The video was able to give you some idea about alpha and beta thanks for watching this video. Watch this space for more such topics until then happy investing if you have any questions let us know in the comment section.
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