Alpha and beta are two of the key measurements used to evaluate the performance of a stock, a fund, or an investment portfolio.
Alpha measures the amount that the investment has returned in comparison to the market index or other broad benchmark that it is compared against.
Beta measures the relative volatility of an investment. It is an indication of its relative risk.
Alpha and beta are standard calculations that are used to evaluate an investment portfolio’s returns, along with standard deviation, R-squared, and the Sharpe ratio.
Alpha
The alpha figure for a stock is represented as a single number, like 3 or -5. However, the number actually indicates the percentage above or below a benchmark index that the stock or fund price achieved. In this case, the stock or fund did 3% better and 5% worse, respectively, than the index.
An alpha of 1.0 means the investment outperformed its benchmark index by 1%. An alpha of -1.0 means the investment underperformed its benchmark index by 1%. If the alpha is zero, its return matched the benchmark.
Note, alpha is a historical number. It's useful to track a stock's alpha over time to see how it did, but it can't tell you how it will do tomorrow.
Formula for Alpha:
Beta
Often referred to as the beta coefficient, beta is an indication of the volatility of a stock, a fund, or a stock portfolio in comparison with the market as a whole. A benchmark index (most commonly the S&P 500) is used as the proxy measurement for the market. Knowing how volatile a stock's price is can help an investor decide whether it is worth the risk.
The baseline number for beta is one, which indicates that the security's price moves exactly as the market moves. A beta of less than 1 means that the security is less volatile than the market, while a beta greater than 1 indicates that its price is more volatile than the market.
If a stock's beta is 1.5, it is considered to be 50% more volatile than the overall market.
Like alpha, beta is a historical number.
Formula for Beta
