Welcome To Our Hawley Advisors Blog

We hope you find the articles on our blog informative and helpful. You are always welcome to chat with us if you have any questions about your personal financial situation.

Generating Alpha. What is it and Why is it Desirable?

When somone in the investment world refers to "generating alpha" or "beating alpha" they are referring to out-performing a given market indexes annual performance. Alpha is a performance indicator and a component of MPT (Modern Potfolio Theory). The objective of modern portfolio theory (MPT) which was developed in the 1950's is to find the best possible diversification strategies with the objective of achieving a greater expected return with a lower amount of risk. In order to do this it evaluates the following five risk variables:

  • alpha
  • beta
  • standard deviation
  • R-squared, and
  • Sharpe ratio.

The overall objective of MPT, as it has evolved, is for investors or rather investment managers/advisors to find a combination of non-correlated investments that have the best potential expected level of return for an appropriate level of risk. 

Investors want to be able to assess the level of performance vs. the risk they are taking. If an investor is taking outsized risk they will expect outsized performance in the event the investment performs as anticipated. If that is not the case, one would naturally have to assess whether taking outsized risk is worth it. 

Alpha is measured in percentage terms. For example, a positive alpha of 2% means that the investment has out-performed a benchmark index by 2%. A negative alpha of 1% means an investment has under-performed an index by 1%.

Alpha is therfore a comparative performance measure that is often used to rank mutual funds and other types of investments.

A more in-depth analysis of 'alpha" may also include "Jensen's Alpha" which takes the capital asset pricing model into account and includes a risk adjusted component in terms of how it is calculated. Apha and Beta are often used together by investment managements to compare and analyze returns.

 

 

 

 

The Origins of Thanksgiving - It May Not Be What Y...
Why Navigating the Markets and Your Financial Futu...

Main Menu

The Hawley Communique

Sign up for free to receive our signature quarterly reports.Not only will they keep you informed, you will get a unique and up to date objective financial perspective to navigate your pre and post retirement. You will also receive our retirement planning article series that provides helpful information about a variety of topics.

Subscribe Here

Hawley Advisor Publications

Download our free marquis papers written to provide valuable and actionable information to help you plan for your retirement and asset protection

Download Here

Company Info

Hawley Advisors
1600 South Main Street, Suite 190
Walnut Creek, CA 94596
Phone: 925-906-9800
Fax: 925-906-9884
info@hawleyadvisors.com

 

 

Hawley Advisors is an investment advisor, registered with the State of California. Any investment ideas or strategies on this website are for the purposes of education and general information only and should not be construed as specific investment advice. For more information about our firm please check the SEC Public Disclosure website: https://www.adviserinfo.sec.gov/

 

Copyright © 2020 Hawley Advisors. All rights reserved.