Alpha and Beta

Investors often use the metrics alpha and Beta when analyzing stocks and portfolios.

Let’s understand the benchmark index first. A benchmark index is a group of stocks an investor uses as a standard to compare their investments against. So, for example, when an investor says, ‘my portfolio is beating the market,’ what do they mean? The market is a benchmark index primarily represented by the Nifty 50, SENSEX, or other stock indexes. All of these include a defined number of stocks, and the increase and decrease of each of these indices are reported on the news each day as ‘the market went up or ‘the market dropped.’

What is Alpha?

The metric ‘Alpha’ is the movement of a stock or portfolio relative to a benchmark index. An Alpha of zero means that your stock or portfolio moves precisely the same as the benchmark index. If you use the Nifty 50 as your index and it closes the day up 2%, your stock or portfolio would also close up 2%.