Difference Between Beta and Alpha

By: | Updated: Nov-12, 2022
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Beta and alpha are two important keywords that are used in financial markets. These two words are used to define the risk, return, and volatility of a financial product.

Summary Table

Beta Alpha
Measure the rate an investment performs. Measure the ability to provide financial returns.
Refer to the contribution of a market portfolio. Refer to the percentage of whether an investment is successful or not.

Difference Between Beta and Alpha

The ‘beta’ of a financial asset is measured by its volatility. A ‘normal’ beta is positive and it measures the sensitivity of the asset to the movement in the market value. A beta greater than 1 is considered riskier.

Alpha measures a performance measure for a particular strategy or product that trades securities in addition to measuring its standard deviation (risk).

Definitions

Beta is measured as an index that measures the rate at which an investment performs if the stock market itself changes.

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The amount that a particular investment contributes to the risk of a market portfolio helps decide whether that investment is profitable or not if you only add a very limited number of assets to that portfolio.

What alfa measures is the investment’s ability to provide positive financial returns, if it has performed better than a typical market index over some time.

When an investment yields more money from an investment, it will be considered as having an altitude of 2% or more, compared with the market.

Difference Between Beta and Alpha

The main difference between beta and alpha is the risk and return of the asset, as well as the expected return.

Alpha measures the performance of an investment, which has already generated a profit.

Beta measures the sensitivity of an investment to a change in its market value, concerning changes in the market value.

The first way is usually more volatile than the second, and it is based on historical data. It takes into account both price movements and movements in returns over time. This means that you need a long period to obtain reliable results.

In the financial market, alpha is measured as the performance of a fund or a portfolio that is achieved over a given period. The higher the alpha, the better the performance.

If an investment has performed better than the market, it will be considered as having an altitude of 2% or more, compared with the market.

To determine whether an investment has an altitude of 2% or more, it is important to compare its results with those that can be obtained by investments that are not riskier.

The other way to measure alpha is to compare an investment’s performance with a random number. The difference between the two can be expressed in percentage points (or percentages).

Alpha measures are an investment’s ability to generate positive financial returns if it has performed better than a typical market index over some time. If you invest in this asset, and it performs worse than other assets, your return will be lower than what you expect.

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