Alpha And Risk Management

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If you are interested in making as much money as you can off your investments then you will want to learn as much as possible about alpha and risk management. Of course, you can't just stop with alpha and assume that you will be able to measure any fund's level of risk and its performance as compared to the market as a whole. However, when you are learning about alpha it makes sense to learn about the other statistical calculations that are used to determine a fund's performance. These include the standard deviation, R squared, alpha and beta. Together, all of these calculations allow an investor or a fund manager to determine how a fund or investment is performing in relation to its benchmark and the rest of the market.

Standard Deviation
Computing the standard deviation may be a bit much unless you are really into math, but there are many different websites that will provide you with this information for a small fee. The reason the standard deviation is important is because the standard deviation is what shows the volatility of the fund. This shows how likely to fund is to increase or decrease in a period of time. When a fund is volatile it means it is high risk because it could perform well or tank at any second.

R Squared
Investors use R Squared to determine if the set benchmark is appropriate. It measures the way the fund moves in relation to the corresponding index. It shows whether the fund's volatility results from the market's daily fluctuations or based on other causes.

Beta
Beta measures a fund's risk based on that fund's benchmark. When R Squared is high then it makes beta and ultimately alpha measurements more accurate. The closer R Squared is to 100 the more accurate beta will be.

Alpha
Alpha calculations are based on beta and show how the fund performed based on the additional risk that was taken. Beta must be calculated accurately to have an alpha figure that is accurate.

Never use only one of these statistical calculations to make investment choices. Instead, use them together and with your knowledge of the fund and the market conditions.

About the Author:
Alpha measures a portfolio's return that is in excess of the market return after both are adjusted for risk. Investors seeking higher alpha can consider long short mutual funds as part of their core portfolio holdings.




Article Originally Published On: http://www.articlesnatch.com


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