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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 / Markets / Industries / Technology
Monday, May 12, 2008
Analysis
China Earthquake Hits Home for U.S. Companies
Ken Sweet
FOXBusiness
Several U.S.-based companies said Monday they were affected by a severe earthquake in China and are assessing further damages.
A 7.8 magnitude earthquake struck the Chinese province of Sichuan, located in central China. According to recent estimates by Reuters and other news outlets, more than 8,500 people have been killed. The number is expected to rise.
While Sichuan is not a major manufacturing region, several U.S. companies do have manufacturing offices in Sichuan.
Two of the most heavily affected companies appear to be microchip maker Intel (INTC) and retail giant Wal-Mart (WMT).
Intel said it had to stop production at one of its Sichuan-based factories.
Company spokesman Chuck Malloy said the factory is located 55 miles southeast of the quake’s epicenter and has been shut down because of a lack of electricity and water.
While the factory was not physically damaged and none of its 2,000 employees were injured in the quake, the factory’s main power and water generators are down and the plant is running on backup to maintain its vital systems. The factory produces testing equipment Intel's microchip and semiconductor divisions.
Intel does not believe there will be any major supply disruptions to its customers because of the earthquake.
Wal-Mart said several of its stores in Chengdu, the capital of Sichuan province, were damaged in the earthquake and have been closed. Fifteen stores remained closed and are working to reopen as soon as possible, a Wal-Mart spokesman said.
No one inside the stores was injured.
Wal-Mart decline to provide information about any factories it might have relationships with in Sichuan province. Wal-Mart does not own factories, but often subcontracts production of its products to local factories, so it might have been affected on a production side as well.
Several car manufacturers have factories in Sichuan and neighboring provinces. Ford (F) said it had to shut down its Chongqing production lines for 30 to 40 minutes when the earthquake occurred. Production has now returned to normal however.
Japanese car makers Isuzu Motors and Suzuki also stopped production at factories in Sichuan province as a precaution, Dow Jones reported, citing the Kyoto News.
Microsoft’s (MSFT) video game research & development labs in Chengdu were also affected.
“We can confirm that our Beijing and Chengdu staffs are safe and accounted for. While the Chengdu building did sustain some minor damage, our offices remain in operation. We continue to coordinate with our China subsidiary to gather information about our employees in other locations,” said a Microsoft spokesperson.
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