Meet the Greeks: Alpha and Beta


As with any purchase, it would be wise to learn as much as you can about a stock or mutual fund before investing. Two measures that you might find helpful are represented by the first and second letters of the Greek alphabet: alpha and beta.

Both are used to compare the performance of an investment — a stock, a fund, or an entire portfolio — to a benchmark such as the S&P 500 index, an unmanaged group of securities that is considered to be representative of the stock market in general.

Alpha measures investment returns compared to the benchmark. A positive alpha means the investment outperformed the benchmark, whereas a negative alpha indicates it underperformed. For example, an alpha of 1.0 means that the investment’s return was 1.0% higher than the benchmark. Assuming the benchmark earned 10%, the investment would have earned 11%.

Beta measures the investment’s volatility. By definition, the market as a whole has a beta of 1.0. A beta higher than 1.0 means the investment has been more volatile than the market, whereas a beta below 1.0 indicates it has been less volatile. For example, a beta of 1.2 means that the investment has been 20% more volatile than the market. In theory, such an investment might earn 20% more than the market during an upswing but might lose 20% more during a downswing.

Although alpha and beta can be useful measures, past performance does not guarantee future results, and many other factors should be considered when choosing an investment.

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The return and principal value of stocks and mutual funds fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost. The performance of an unmanaged index is not indicative of the performance of any specific investment. Individuals cannot invest directly in an index.

Mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2015 Emerald Connect, LLC


Lamont Financial Services
250 Bel Marin Keys Blvd, Suite F3 Novato, CA 94949
Phone: (415)883-5200
www.lamontfinancial.com jlamont@lamontfinancialservices.com

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