The alpha and beta of a manager vs. a benchmark are obtained by fitting a straight line to the points in a scatter plot of the market returns vs. the manager's returns. Alpha is the intercept of this straight line, while beta is the slope. Hence, if the market returns change by some amount x, then the manager returns can be expected to change by
Beta * x.
Alpha is the mean of the excess return of the manager over beta times benchmark:
mean(i = 1, ... , m)( mi - Beta * bi )
Alpha is a measure
of risk (beta)-adjusted return.
StyleADVISOR includes
two Alpha and Beta statistics: Alpha and Beta and Cash-Adjusted Alpha and Beta.
The Cash-Adjusted Alpha and Beta, which are the most commonly used, subtract the
risk-free rate from the returns of both the manager and benchmark. Otherwise,
the formulas are the same.
Related Statistics:
Beta
R-Squared
