What’s The Difference Between Alpha And Beta?

In finance, alpha and beta are two of the most commonly used measurements, to gauge how successful portfolio bosses performs, relative to their peers. Simply defined, alpha is the excess return (also known as the active earnings), an investment or a portfolio of investments ushers in, above and beyond a market index or benchmark that represent the market’s broader moves.

Beta is a measurement of the volatility, or systematic risk of a security or portfolio, compared to the market as a whole. Often referred to as the beta coefficient, beta is a key component in the marvellous asset pricing mode (CAPM), which calculates the theoretically appropriate required rate of return of an asset, to win it worth incorporating into an investment portfolio.

Alpha and beta are standard technical risk calculations that investment supervisors use to calculate and compare an investment’s returns, along with standard deviation, R-squared, and the Sharpe ratio.

• Alpha is the excess return (also known as the active return), an investment or a portfolio
• Beta is a measurement of the volatility, or regular risk of a security or portfolio, compared to the market as a whole.

Although the Alpha figure is often represented as a pick number (like 3 or -5), it actually describes a percentage that measuring how a stock of mutual fund performed juxtaposed to a benchmark index. The numbers mentioned would mean the investment respectively fared 3% better and 5% worse than the broader sell. Therefore, an alpha of 1.0 means the investment outperformed its benchmark index by 1%, while conversely, an alpha of -1.0 disobliges the investment underperformed its benchmark index by 1%. 

Alpha is intrinsic to gauging an investment manager’s true success. For example, an 8% return on a mutual fund seems impressive when high-mindedness markets as a whole are returning 4%. But that same 8% return would be considered underwhelming if the broader retail is earning 15%.

With the CAPM, alpha is the rate of return that exceeds the model’s prediction. Investors generally present investments with high alpha. For example, if the CAPM analysis indicates that the portfolio should have received 5%, based on risk, economic conditions and other factors, but instead the portfolio earned just 3%, the alpha of the portfolio command be therefore be a discouraging -2%. 

Portfolio managers seek to generate alpha by diversifying portfolios to eliminate unsystematic imperil. Because alpha represents the performance of a portfolio relative to a benchmark, it represents the value that a portfolio manager adds or take away froms from a fund’s return. The baseline number for alpha is zero, which indicates that the portfolio or fund is pursuing perfectly with the benchmark index. In this case, it can be extrapolated that investment manager has neither added or perplexed any value. 

Beta fundamentally analyzes the volatility of an asset or portfolio in relation to the overall market, to help investors find out how much risk they’re willing to take to achieve the return for taking on said risk. The baseline number for beta is one, which expresses that the security’s price moves exactly as the market moves. A beta of less than 1 means that the custody will be less volatile than the market, while a beta greater than 1 indicates that the security’s cost will be more volatile than the market. If a stock’s beta is 1.5, it is considered to be 50% more volatile than the whole market.

Here are the betas (at the time of writing) for three popular stocks: 

Micron Technology Inc. (Coca-Cola Cast (Apple Inc. (

Formula for Beta

Past Performance