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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 / Lifestyle & Money / Travel & Lifestyle
Wednesday, May 14, 2008
More Than a Feeling
Nancy Colasurdo, Life Coach
FOXBusiness
Tommy DeCarlo is on a leave of absence from his job at Home Depot in Charlotte, N.C. After all, he has a fun summer planned. He’s the new lead singer for the rock band Boston, which is touring the country starting in June.
DeCarlo was interviewed on New York’s classic rock station, Q104.3, on Wednesday morning and the whole story of how he came to fill in for former lead singer Brad Delp warmed this life coach’s heart. After Delp committed suicide last year, DeCarlo decided to create a tribute with a karaoke machine and his own pipes; his daughter turned him on to MySpace.com as a forum.
Fast forward to the day Boston founder Tom Scholz was at home and heard music coming from the computer. He asked his wife if she was listening to one of Boston’s live performances and she informed him it was some guy in North Carolina. That guy, DeCarlo, is the band’s new frontman. That’s how much he sounds like Delp. And he’d never been in a band before!
This is one of those stories I love to tell my coaching clients who think it’s a waste of time to pursue their interests outside of work. So many have abandoned the music, the painting, the half-written book. Not everyone has to take a conventional, tried-and-true path for something satisfying or even spectacular to happen.
Just one day before hearing DeCarlo on the radio, I was cranking out some miles on the treadmill while watching Jimmy Fallon on The Today Show. He was carrying a copy of his eighth grade yearbook and the hosts prompted him to explain why. In NBC’s press conference Monday announcing he would succeed Conan O’Brien as the next host of “Late Night” in 2009, he had said his kindergarten yearbook predicted he would be the host of “Late Night” after David Letterman.
Well, remarkably, the latter part turned out to be accurate, but Fallon’s mother corrected him and noted the prediction was in his eighth grade yearbook, not kindergarten. Even better, in my book. By eighth grade, we are more “formed” and so it makes the statement emblazoned over his youthful photo seem less like a lark and more like a real impression of where his talents and ambition were.
This isn’t to say that if your yearbook says you were most likely to wind up in jail or be president of the United States, you will. I know those things are mostly done for fun. But I contend there is something to the act of writing things down, committing them to print, or in the case of DeCarlo, recording them, that creates stronger possibility.
This brings me to yet another morning this week. While flipping through coupons with Mom on Mother’s Day, a glossy advertisement with Ellen Degeneres’ picture caught my eye. The banner read, “Advil wants to help you accomplish your Life List.” Degeneres has been featuring the Life List concept on her show and apparently Advil is offering up $25,000 to one winner “to do what you never thought possible.”
“This all came from a viewer last season who had a life list because she had cystic fibrosis,” Degeneres said in an Associated Press interview in 2006. “She started a life list to accomplish things by the time she was 40 and we helped her accomplish a bunch of those. We thought it was a really great idea.”
It is. When the movie The Bucket List came out last year, these became pretty popular. It’s simply (or not) a list of things you want to do before you die. For example, in the aforementioned AP interview, Degeneres said she asked Beyonce what was on her list and the answer was learning to speak Arabic and jumping out of a plane.
What’s on yours?
Dig deep on this. Tap into your current interests. Think about some you may have abandoned. Maybe your yearbook has some clues. Personally, I think there’s an art tour of Europe in my future.
This can be a luxurious exercise. With rising food and gas prices, foreclosures run amok, and a grim economic outlook overall in our country, why not use this lighthearted tool to give yourself a boost? After all, I think we’ve seen that some people are doing A-OK in spite of it all.
Come on. Dare to record your wishes. Make some predictions. Something will come of it. I swear.
It’s more than a feeling.
Nancy Colasurdo is a practicing life coach and freelance writer. Her Web site is www.nancola.com. Please direct all questions/comments to FOXGamePlan@gmail.com.
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