alpha rating

Fin

the return a security or a portfolio would be expected to earn if the market’s rate of return were zero. Alpha expresses the difference between the return expected from a stock or unit trust, given its beta rating, and the return actually produced. A stock or trust that returns more than its beta would predict has a positive alpha, while one that returns less than the amount predicted by beta has a negative alpha. A large positive alpha indicates a strong performance, while a large negative alpha indicates a dismal performance.

     To begin with, the market itself is assigned a beta of 1.0. If a stock or trust has a beta of 1.2, this means its price is likely to rise or fall by 12% when the overall market rises or falls by 10%; a beta of 7.0 means the stock or trust price is likely to move up or down at 70% of the level of the market change.

     In practice, an alpha of 0.4 means the stock or trust in question outperformed the market-based return estimate by 0.4%. An alpha of –0.6 means the return was 0.6% less than would have been predicted from the change in the market alone.

     Both alpha and beta should be readily available upon request from investment firms, because the figures appear in standard performance reports. It is always best to ask for them, because calculating a stock’s alpha rating requires first knowing a stock’s beta rating, and beta calculations can involve mathematical complexities.

See also beta rating