When the markets are trending, the high beta stocks will do better, but when markets tank, the high beta stocks will crash more, and low beta stocks will start to look more attractive. The beta exposure is preferable based on the market. A good stock picker understands the rationale behind the alpha and can time the participation in high alpha stocks based on the opportunity. ![]() Understanding these numbers will give you extra dimensions to your stock selection journey.Ī stock with high alpha is always preferable, but alpha is fleeting and gets quickly arbitraged away. The alpha and beta values are ways to explain the characteristics of stock returns. How to evaluate a stock based on its alpha and beta values? Hence, any return above the market is the “abnormal” or “excess” return.Īctive portfolio managers seek to generate alpha in diversified portfolios by picking stocks that can beat the benchmark. What is the alpha of a stock?Īlpha is often used in investing to describe an investment strategy’s ability to beat the market or its “edge.” There is a belief that markets are efficient, and so there is no way to systematically earn returns that exceed the broad market as a whole. Conversely, a stock with a beta less than one will have a much-muted performance in either direction relative to the market, an example being an FMCG stock like ITC. ![]() An example of such a high beta stock is a banking stock like HDFC Bank. A beta coefficient can measure the volatility of an individual stock compared to the systematic risk of the entire market.Ī way to understand this is – a stock with a beta higher than one will move up more than the market when the market is moving up and move down more when the market is going down. ![]() It also provides insights into how volatile–or risky–a stock is relative to the rest of the market. The beta is used to help investors understand whether a stock moves in the same direction as the rest of the market. How to evaluate a stock based on its alpha and beta values?.
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