What's the difference between alpha and beta?

Modified on Tue, 19 Jun 2018 at 04:08 PM

Alpha is used in finance as a measure of performance. Alpha, often considered the active return on an investment, gauges the performance of an investment against a market index or benchmark which is considered to represent the market’s movement as a whole. The excess return of an investment relative to the return of a benchmark index is the investment’s alpha.

Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Beta is used in the capital asset pricing model (CAPM), which calculates the expected return of an asset based on its beta and expected market returns. Beta is also known as the beta coefficient.

Alpha and beta are used together by investment managers to calculate, compare, and analyze returns. They are two of the five standard technical risk calculations, the other three being the standard deviation, R-squared, and the Sharpe ratio.

Source : Investopedia

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