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A popular Wendy's commercial in the 80s made famous the question: "Where's the beef?" Good one. And here's an even better one: "Where's the alpha?" You might want to whip this one out the next time you meet with your portfolio manager.
Alpha is the over-and-above-the-expected return. It is the "value added." Therefore, it makes sense that a positive alpha means an investment has outperformed its market-predicted return, while a negative alpha would mean just the opposite. The expected return is calculated by a formula that takes into account the investment's level of unavoidable risk (aka beta).
Ever stepped into an elevator and after the doors close you become aware of an almost-suffocating scent coming from the woman next to you who must have bathed in perfume? Well, as you know, once the doors close you can't escape the smell until the ride is over. This is similar to beta, which is risk that can't be reduced or diversified away. A measure of "systematic" or market related risk, beta is used as a measure relative to a certain index -- such as the S&P 500.
So, for example, let¿s say your portfolio is managed to compete against the S&P 500. If you generate a better return than the index while not taking on added risk (standard deviation of returns) then you get alpha. Low beta means the market-related risk is low and vice versa for high beta.
Another example, let's say a mutual fund or stock has a beta of 1.5 relative to the S&
P500 ¿ that means it is 1.5 times as risky. So, over time, if the S&P 500 goes up 1%, your portfolio should be up 1.5%
plus (one can hope) some percentage of alpha. If the S&P 500 is down 1%, your portfolio should be down 1.5%.
Alpha
and beta are based off of linear regression of a set of data. Warning: this may cause a high school fifth-period flashback,
but it will be over before you know it:
The equation for a line is Y = a + bX.
a = alpha (the Y intercept - the added
value)
b = Beta (the coefficient you multiply X by)
X = S&P 500 (in this case)
Y = your portfolio
Home / Personal Finance / Financial Planning / Family & Estates
Tuesday, December 04, 2007
Kid Money
Higher Earning Power as Adults is Music to Kids' Ears
Kathryn Elizabeth Tuggle
FOXBusiness
NEW YORK--Music may strike fire in the hearts of man, but does it also fill his pockets?
A recent study by Harris Interactive (HPOL) shows that 83% of people who make more than $150,000 a year had some type of musical training when they were young. According to the study, conducted in October of 2007, 86% of college graduates and 88% of people with postgraduate degrees had music lessons as children. That shows that being connected with music is important, said Regina Corso, director of the Harris Poll.
“The takeaway from the study is that people are obviously getting something big out of music,” Corso said. “Fourty-four percent of those who had musical training said it has helped them strive for individual excellence, and given them a disciplined approach to life. Basically, it equips people to be team players and it’s fun.”
The study did not
take into consideration the type of music studied, and Corso said that people surveyed had done everything from private flute
lessons in kindergarten to performing in garage bands in high school. “The idea of being connected with music is the important
thing here,” Corso said.
Don Campbell, author of The Mozart Effect, a book about the benefits of music in early
childhood, said that music reaches multiple levels of the brain simultaneously.
“Music in early childhood as well as
high school creates an organized, auditory means for the development of time/space coordination,” Campbell said. He said he
was “not at all surprised” to hear of the study, but cautioned that “not everyone who studies music is going to make a lot
of money.”
The key is helping children foster their problem-solving skills "and those are developed through play with other children, not through music,” said Thomas L. Reed, an associate professor of early childhood education at the University of South Carolina Upstate. “Music is a mathematical skill, so I’d be willing to bet [the individuals in the study] also did well in math, which may be the reason why they earn more.”
Reed, who is also vice president of the International Play Association, which advocates the rights for children to develop through play as opposed to living as "little adults," agreed with Campbell, saying that musical talent is often nurtured by loving parents, and that upbringing has a lot to do with later life success.
“Any child I have seen that has musical talent seems to also have involved parents, so it seems they do
perform better academically, but a lot of that has to do with attention that’s given to them,” Reed said.
He said
that the benchmark for a child’s success is typically the parents’ income and educational level. “If you want to increase
any score in any particular school, the more parent involvement there is, the better the score," Reed said. "That’s a pretty
known fact.”
However, Reed said that he did see potential correlating benefits between childhood music and the adult
workplace.
“Musicians have to show up on time for lessons, and punctuality is pretty important wherever you go,”
he said.
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