Alpha, Net Alpha and Beta

(The weekly series - Pocket Money - where I explain financial basics in fewer than 200 words. Feel free to make suggestions!)

These are ways to measure how investments perform and they're quite interesting - not just for finance bros.

• Beta: Measures how an investment moves compared to the overall market.

  • A beta of 1 means it moves with the market.

  • Higher than 1 means it's more volatile i.e. bigger swings up and/or down.

  • Lower than 1 means it's less volatile and more stable.

• Alpha: Measures how an investment does compared to expectations based on risk level.

  • Positive alpha means it's beating expectations.

  • Negative alpha means it's underperforming.

• Net alpha: Does the same as alpha but takes into account fees.
  

Net alpha is often where active management fails compared to passive management. If a fund beats the market by 2% (a positive alpha!) but the charges are 2.5%, then your net alpha is -0.5% and you've lost money compared to what you could have earned. You might as well have been just tracking the market cheaply.

Love Eleanor. xxx