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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 / Real Estate & Mortgage
Wednesday, April 23, 2008
Mortgage Application Volume Sinks as Rates Soar
Associated Press
WASHINGTON --Mortgage application volume fell 14.2% during the week ending April 18, according to the Mortgage Bankers Association's weekly
application survey.
The MBA's application index fell to 637.6 from 743.4 the previous week.
Refinance
volume fell 20.2%, while purchase volume declined 6.4%. Refinance applications accounted for 49.2% of total applications compared
with 53.5% a week earlier.
The index peaked at 1,856.7 during the week ending May 30, 2003, at the height of the
housing boom.
An index value of 100 is equal to the application volume on March 16, 1990, the first week the MBA
tracked application volume. A reading of 637.6 means mortgage application activity is 6.376 times higher than it was when
the MBA began tracking the data.
The survey provides a snapshot of mortgage lending activity among mortgage bankers,
commercial banks and thrifts. It covers about 50% of all residential retail mortgage originations each week.
Application
volume fell as interest rates for fixed-rate loans moved higher.
The average interest rate for traditional, 30-year
fixed-rate mortgages rose to 6.04% from 5.74% the previous week.
The average rate for 15-year fixed-rate mortgages,
often a popular option for refinancing a loan, increased to 5.6% from 5.27%.
The rate for one-year adjustable-rate
mortgages fell to 6.93% from 7.02% the previous week
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