High Beta Stocks

If the Alpha is consistently positive, it suggests the manager’s decisions are outperforming the market. Conversely, if the Beta of the portfolio is too high, it may signal that the portfolio is too risky and vulnerable to market volatility. Alpha is the difference between the returns of a stock vs the expected returns based on its Beta. If a stock has a high Beta value then it has more risk and so the expected returns are higher.

In this example, the calculated alpha is 0.4%, indicating that the portfolio has generated a positive excess return of 0.4% compared to the market benchmark. If you’re risk-averse, you may want to look for investments with lower betas. On the other hand, if you’re comfortable with more risk in the pursuit of higher returns, you might prefer investments with higher betas. Alpha is one of several performance measures that are commonly used to evaluate an investment security or portfolio. Another common performance measure is Beta, which measures a stock’s volatility compared with an index.

Investors can use alpha and beta to enhance their portfolio management strategies by integrating these measures into their decision-making process. By analyzing the alpha of potential investments, investors can identify opportunities that may outperform their benchmarks and contribute positively to overall portfolio returns. Meanwhile, assessing beta allows investors to gauge the level of risk each investment adds to their portfolio. Alpha is a measure of the excess return per unit of risk, where risk is measured by the beta or the volatility of the investment or portfolio relative to the benchmark. However, beta and volatility are not the only sources of risk in investing.

Alpha is a measure of an investment’s performance relative to a market index. It reflects the true value added (or value destroyed) by a portfolio manager’s investment decisions. A positive alpha would mean the specific investment outperformed the broader market, while a negative alpha would refer to an underperformance. Understanding alpha and beta is essential for making informed investment decisions.

Best Blue Chip Mutual Funds – List of Top Large-Cap Funds

• The WisdomTree U.S. Quality Dividend Growth Fund (DGRW) is an equity investment with higher market risk that seeks to invest in dividend growth equities.
• We will explain what they mean, how they are calculated, and how they can be used to compare different investments.
• A passive investor places a bet on beta and has little faith in the illusive alpha, whereas an active investor places a wager on his capacity to produce the alpha.
• Investors and portfolio managers often seek to achieve a positive alpha through active management strategies.
• Analyse their financial health, growth prospects, and recent performance.

For example, an investor seeking high returns in a rising market may prioritize assets with higher Betas, which have the potential for greater capital appreciation. On the other hand, an investor looking to minimize risk may focus on stocks with low Betas, even if those assets have lower Alpha potential. Beta is particularly useful for portfolio diversification because it allows investors to balance stocks with different levels of risk. A well-diversified portfolio typically contains a mix of assets with varying Betas to mitigate potential losses. You can easily find correlations for every stock in your symbol list by running the Correlation Matrix template in EdgeRater.

What Are Alpha and Beta in Finance?

This is done by defining whether the investment is yielding higher than the market index return or not. Although it’s instrumental for tracking performance over time, it remains inadequate as a predictive tool for future performance. The efficient market hypothesis (EMH) postulates that market prices incorporate all available information at all times, so securities are always properly priced (the market is efficient). Therefore, according to the EMH, there is no way to systematically identify and take advantage of mispricings in the market because they do not exist.

How to calculate beta?

Your learning experience here is intended to empower you with knowledge, reducing the jargon-induced uncertainties that often bewilder new investors or those unfamiliar with financial terms. Moreover, because most traditional financial advisors charge a fee, when one manages a portfolio and nets an alpha of zero, it actually represents a slight net loss for the investor. By now, you may have understood what a high beta stock is, its merits and demerits, and whether you should invest in it or not. You also know how to get the list of high-volatility stocks using Tickertape Stock Screener. For example, if the Nifty moves up by 1.5%, the stock price falls alpha and beta of stocks by -1.25%. Discover the convenience of investing in stocks through ready-made portfolios curated by SEBI-registered experts.

Contents

• The two ratios are both used in the Capital Assets Pricing Model (CAPM) to analyze a portfolio of investments and assess its theoretical performance.
• Alpha is the difference between the returns of a stock vs the expected returns based on its Beta.
• After correcting for volatility, an investment that has an alpha larger than zero has done well.
• For this purpose, you can check the list of high beta stocks nse or the fno stocks list.

Alpha is essentially the measure of an investment’s performance relative to a specific benchmark, like the S&P 500. Think of it as the “extra juice” an investment strategy or fund manager generates above and beyond what the market delivers. If an investment achieves an alpha of 2, it means it outperformed the market by 2%. 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.

High Beta Stocks

Positive alpha indicates the investment performed better than expected, while negative alpha indicates it underperformed. If you are looking to add low beta stocks to your investment portfolio, visit Tickertape Stock Screener and add ‘Beta’ filter to customise your search instantly. Beta is a measure of how much a stock moved up or down compared to the up or down move of the other instrument. It can be thought of as the volatility or risk of one stock vs another. A stock with a Beta value of 1 has exactly the same magnitude of move as the compared stock. A beta value of 2 means the magnitude is twice that of the compared stock.

High Beta Stocks Meaning

Embrace the dynamic duo of alpha and beta to pave your way toward financial success. At Tickertape, I’m dedicated to presenting my learning and providing insightful suggestions to help my readers make sound investment decision. They are less volatile than the market and are generally preferred by risk-averse investors. It is noteworthy that in turbulent markets, low beta stocks show higher stability. For risk-averse investors, Alpha and Beta can also be useful tools in managing and controlling risk. By investing in stocks with low Betas, they can reduce their exposure to market fluctuations and preserve capital.

How to Use Alpha for Investing?

Beta coefficient, or simply beta, is a measure of a stock’s volatility or relative risk in relation to the performance of the overall market. An investor can gain invaluable knowledge from this measure of volatility on whether a specific investment carries a risk that is higher or lower than the benchmark. Beta is a measure of volatility in relation to a benchmark, and discussing beta first is actually simpler. Comparing a securities or portfolio’s systematic risk to an index like the S&P 500. The beta of many growth equities would be higher than 1, likely much higher. Because T-bill prices are so stable in relation to the market as a whole, their beta would be close to zero.