Knowledge Is Alpha For Your Portfolio

By Author: Jamie Hanson
Total Articles: 3534
Comment this article

When it comes to investing the biggest favor you can do for yourself is know how to evaluate risk, when to let a position go, and how to determine if a fund or investment is performing below or above its benchmark. If you have no idea how to do any of this then the money you have invested is at serious risk. However, it's not too late. You can study and learn and improve the standing of your portfolio as well as its long term performance. You must take the time to truly learn what statistical calculations will mean to your portfolio and how to consider them in addition to other market information. When you know how to do this then you truly will improve your portfolio and you will stand to earn a great deal more from your investments.

Applying Alpha
One thing that must be made clear is that while alpha is very important in determining how your investment reacted to an applied risk, it is not a calculation that may be used on its own. The reason being is that alpha is only a piece of the puzzle. In order to see the entire picture you must also understand beta, R Squared, and the Standard Deviation. If that feels ...
... like you have to go back to math class and you would rather not then make sure your fund manager knows what these terms are, how to apply them, and explains what they mean to you in layman's terms so you can have some input.

Why is it important?
The reason why alpha is important is because it shows how a particular investment reacted to an additional risk. This allows investors to see if a risk that was taken paid off, or not, quite easily.

Alpha measures a portfolio's return that is in excess of the market return after both are adjusted for risk. Investors seeking higher alpha can consider long short mutual funds as part of their core portfolio holdings.