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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
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Wednesday, May 21, 2008
Barnes and Noble Looks to Purchase Borders
FOXBusiness
Barnes & Noble (BKS) may be considering an acquisition of Borders (BGP), and has hired a team of advisers to investigate the purchase, according to the Wall Street Journal, which cited people familiar with the situation.
Barnes and Noble is the largest bookseller in the U.S. with Borders coming in second.
The biggest question in a possible deal would be antitrust regulations.
According to the Journal, Barnes and Noble retains about 20% to 22% of the book market, while Borders has about 10% to 12%. If the two giants combined, they would control a third of the market, thus raising antitrust concerns.
Barnes and Noble has been hit fairly hard in recent years by online retailers and sluggish sales. Amazon.com (AMZN) now controls about 15% of the market, according to the Journal. A deal with Borders could boost Barnes and Noble’s profits and allow for cost savings, according to the report.
Borders has been up for sale since March of this year, after the company disclosed liquidity issues. The company is valued at $384.1 million, but a buyer would also take on the company’s debt of $548.6 million. Book sales have shown virtually no growth in the last year, according to the Journal.
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