Portfolios Seek to Amplify Positive Performance
The excess return of an investment relative to the return of its benchmark index is its Alpha.
Alpha strategies are active investment strategies that focus on choosing investments that have the potential to beat the market. Instead of passively investing in index funds that mimic market movements, money managers using alpha strategies research, develop, and execute strategies that center around high potential for alpha.
What is Alpha?
Alpha is a statistical measure of how an investment performs against a given benchmark (such as the S&P 500 index) over a selected period of time. In other words, Alpha is a measure of risk-adjusted performance that is not the result of general movements in the market.
Alpha is typically presented as a single number. An Alpha of zero suggests that an asset has earned a return commensurate with the risk. Alpha greater than zero means an investment outperformed after adjusting for volatility. A negative Alpha means the investment is underperforming for its level of risk.
There are a variety of ways to assess the performance of an investment strategy, but few are as powerful as looking at alpha.
Why Invest for Alpha?
Bottom line, Alpha encompasses both risk and return and marries them together. Risk-averse investors shouldn’t automatically take Alpha as a sign to invest. That investment might still come with significant risk – especially with shorter time horizons. Alpha simply suggests that the returns may beat the market. Investors should always consider both risk and return together, as a balance.
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*Biblically Responsible Investing (BRI) has certain risks based on the fact that the criteria excludes securities of certain issuers for non-financial reasons and, therefore, investors may forgo some market opportunities and the selection of investments available will be smaller.