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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
Tuesday, May 13, 2008
Yahoo Activist Investor Calls for New Board of Directors
FOXBusiness
New York--Yahoo (YHOO), the Sunnyvale, Calif. listed Internet company that fought off an unsolicited bid by Microsoft (MSFT), is seeing activist investor Eric Jackson of Ironfire Capital call for investors to vote against the company’s existing board of directors.
In an interview with Liz Claman on the Fox Business Network, Jackson, who, along with other individual investors collectively own 3.3 million shares of Yahoo, said he’s urging investors from now until Yahoo’s board meeting on July 3 to vote against every one of the 10 board members including Chief Executive Jerry Yang. He said investors are “frustrated” over the board’s “lack of oversight” during the past four years. Jackson noted he wants Yang gone.
“The breakdown in talks with Microsoft is the latest example of another misstep by this board of directors," said Jackson. While Jackson isn’t nominating a slate of directors, given the costs associated with doing that, he said he would support activist investor Carl Icahn or any other shareholder that waged a proxy fight against Yahoo.
“I’m always in favor of Yahoo shareholders whoever they are, coming forward with alternatives,” said Jackson. “I think shareholders are best represented by some new blood. Whether it’s Carl Icahn or whether it’s someone else coming forward with some folks, in general yes I think that’s a good thing.” He said he would support Icahn as long as Icahn was pushing for fresh blood at Yahoo.
Jackson, who was instrumental in the ouster of former Yahoo CEO Terry Semel, is betting shareholders will come out in droves and vote, saying it will likely be the most “participated election” of this year, “People are irate. They are upset," said Jackson.
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