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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
Wednesday, May 14, 2008
Oil Prices Make Slight Dip
Associated Press
![Oil Dollar [276] 2](/images/General/oil_dollar.jpg)
Crude oil futures weakened Wednesday as traders awaited weekly data expected to show increases in U.S. crude and distillates stockpiles.
Light, sweet crude for June delivery fell $1.24 to $124.56 a barrel on the New York Mercantile Exchange on expectations that an Energy Department inventory report later Wednesday will show a big jump in crude supplies. In London, June Brent crude fell $1.74 to $122.36 a barrel on the ICE Futures exchange.
Energy Information Administration
data scheduled for release at 10:30 a.m. EDT (1430 GMT) is expected to show that U.S. crude oil stockpiles rose by 1.8 million
barrels, according to a Dow Jones Newswires poll of analysts, and reveal that distillates stockpiles climbed by 600,000 barrels.
The analysts on average estimate that gasoline stockpiles fell by 100,000 barrels last week and the rate of refinery use increased by 0.7 percentage point to 85.7% of capacity.
"We do not except any major price dislocations emanating from the data, as markets have been fairly resilient over the last two days" despite expected inventory builds, said Edward Meir, an analyst at brokerage MF Global.
Nymex crude futures have climbed in seven of the last eight sessions, touching a record intraday high of $126.98 a barrel Tuesday on a spike in heating oil and concerns about Iranian output. News reports at first indicated that Iran, the No. 2 producer among the Organization of Petroleum Exporting Countries, would decrease oil production next month, but Iran's oil minister later dismissed the report.
Adding pressure to oil prices, Iran's departing OPEC governor, Hossein Kazempour Ardebili, told Dow Jones Newswires the country is storing about 25 million barrels of heavy crude oil in tankers in the Persian Gulf as no buyers are stepping up to the plate.
"We are using about 10-12 vessels to store the crude," Ardebili said in an interview by phone from Tehran.
In other Nymex trading Wednesday, June gasoline futures fell 2.4 cents to $3.176 a gallon, and June heating oil futures fell 2.62 cents to $3.6727 a gallon. June natural gas futures rose 24.1 cents to $11.663 per 1,000 cubic feet.
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