INVESTING INVESTING ESSENTIALS
Alpha Vs. Beta: What's the Difference?


By CAROLINE BANTON Updated June 29, 2021

Reviewed by GORDON SCOTT
Apha Vs. Beta: An Overview
Alpha and beta are two of the key measurements used to evaluate the performance of a stock, a fund, or an investment portfolio.
Alpha measures the amount that the investment has returned in comparison to the market index or other broad benchmark that it is compared against.
Beta measures the relative volatility of an investment. It is an indication of its relative risk.
Alpha and beta are standard calculations that are used to evaluate an investment portfolio’s returns, along with standard deviation, R-squared, and the Sharpe ratio.
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What Is the Difference Between Alpha and Beta
Alpha
The alpha figure for a stock is represented as a single number, like 3 or -5. However, the number actually indicates the percentage above or below a benchmark index that the stock or fund price achieved. In this case, the stock or fund did 3% better and 5% worse, respectively, than the index.
An alpha of 1.0 means the investment outperformed its benchmark index by 1%. An alpha of -1.0 means the investment underperformed its benchmark index by 1%. If the alpha is zero, its return matched the benchmark.
Note, alpha is a historical number. It's useful to track a stock's alpha over time to see how it did, but it can't tell you how it will do tomorrow.
Alpha for Portfolio Managers
For individual investors, alpha helps reveal how a stock or fund might perform in relation to its peers or to the market as a whole.
Professional portfolio managers calculate alpha as the rate of return that exceeds the model's prediction, or comes short of it. They use a capital asset pricing model (CAPM) to project the potential returns of an investment portfolio.
That is generally a higher bar. If the CAPM analysis indicates that the portfolio should have earned 5%, based on risk, economic conditions and other factors, but instead the portfolio earned just 3%, the alpha of the portfolio would be a discouraging -2%. 
Formula for Alpha:
Alpha=
Start Price
End Price​+​DPS​−​Start Price
where:
DPS​=​Distribution per share
Portfolio managers seek to generate a higher alpha by diversifying their portfolios to balance risk.
Because alpha represents the performance of a portfolio relative to a benchmark, it represents the value that a portfolio manager adds or subtracts from a fund's return. The baseline number for alpha is zero, which indicates that the portfolio or fund is tracking perfectly with the benchmark index. In this case, the investment manager has neither added or lost any value. 
Beta
Often referred to as the beta coefficient, beta is an indication of the volatility of a stock, a fund, or a stock portfolio in comparison with the market as a whole.  A benchmark index (most commonly the S&P 500) is used a as the proxy measurement for the market. Knowing how volatile a stock's price is can help an investor decide whether it is worth the risk.
The baseline number for beta is one, which indicates that the security's price moves exactly as the market moves. A beta of less than 1 means that the security is less volatile than the market, while a beta greater than 1 indicates that its price is more volatile than the market.
If a stock's beta is 1.5, it is considered to be 50% more volatile than the overall market.
Like alpha, beta is a historical number.
Beta Examples
Here are the betas at the time of writing for three well-known stocks as of 2021: 
Micron Technology Inc. (MU)0.91
Coca-Cola Company (KO): 0.61
Apple Inc. (AAPL): 1.18
We can see that Micron is 26% more volatile than the market as a whole, while Coca-Cola is 37% as volatile as the market, and Apple is more in line with the market or 0.01% less volatile than the market.
Acceptable betas vary across companies and sectors. Many utility stocks have a beta of less than 1, while many high-tech Nasdaq-listed stocks have a beta of greater than 1. To investors, this signals that tech stocks offer the possibility of higher returns but generally pose more risks, while utility stocks are steady earners.
While a positive alpha is always more desirable than a negative alpha, beta isn’t as clear-cut. Risk-averse investors such as retirees seeking a steady income are attracted to lower beta. Risk-tolerant investors who seek bigger returns are often willing to invest in higher beta stocks.
Formula for Beta
Here is a useful formula for calculating beta:
Beta=
Variance of Market’s Return
CR
where:
CR=Covariance of asset’s return with market’s return
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Related Terms
Excess Returns
Excess returns are returns achieved above and beyond the return of a proxy. Excess returns will depend on a designated investment return comparison for analysis. more
What Is Weighted Alpha?
Weighted alpha measures the performance of a security over a certain period, usually a year, with more importance given to recent activity. more
Volatility
Volatility measures how much the price of a security, derivative, or index fluctuates. more
Beta
Beta is a measure of the volatility, or systematic risk, of a security or portfolio in comparison to the market as a whole. It is used in the capital asset pricing model.more
Beta Risk
Beta risk is the probability that a false null hypothesis will be accepted by a statistical test. more
What Is Relative Return?
Relative return is the return an asset achieves over a period of time compared to a benchmark. more
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