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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 / College & Education
Monday, December 10, 2007
Harvard Cuts College Costs for Middle Class Students
Associated Press
Harvard University announced Monday a major expansion of financial aid that will reduce tuition bills by thousands of dollars -- even for families earning six figures.
The university said it would replace all loans with grants, and spend up to $22 million more annually on aid, mostly targeting middle- and upper-middle class students. Families earning under $60,000 already pay nothing to attend the world's richest university, with an endowment of nearly $35 billion.
Now, however, parents earning between $60,000 and $120,000 will pay a percentage of their income, rising to 10 percent. Families with incomes between $120,000 and $180,000 will have to pay 10 percent of their incomes.
Harvard also said it would take home equity out of its wealth calculation in financial aid, which should provide a greater boost for students and parents. Overall, Harvard said a typical family earning $120,000 would pay about $12,000 next year, down from $19,000 under current award policies. For a typical family earning $180,000, the bill would drop to $18,000, from more than $30,000.
About half of Harvard students receive some form of aid, including students from about 100 families who earn more than $200,000.
For those who pay full tuition, room and board, the price is $45,620.
University officials said their surveys showed even students from well-off families were feeling the pinch by having to work outside jobs and not being able to fully engage in the life of the university. Harvard officials also worried prospective applicants were scared away by the school's cost.
Dean of Admissions and Financial aid William Fitzsimmons said Harvard had grown concerned students were having an "Upstairs, Downstairs" experience. "On the one hand the more affluent students had full access to the full Harvard experience in its totality. But this chunk of people ... 53 percent of the population, we felt were having a diminished experience."
The announcement is the latest of a string by well-endowed universities who are trying to combat perceptions they are unaffordable with major initiatives to reduce the price students actually pay.
A handful of schools, starting with Princeton in 2001, had eliminated all student loans, but Harvard had declined to match that step until Monday's announcement.
Harvard President Drew Gilpin
Faust said the money would come from funds from a variety of sources, including the strong returns on Harvard's endowment.
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