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Alpha and Beta

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 / Family & Estates

Kid Money

Whoa, Baby! $1,000 Strollers?

 
 

NEW YORK--Bringing up baby has never been so expensive. With luxury options like $1,000 strollers and $2,500 reproduction vintage prams, parents can spend a fortune on wheels alone!

And the spending trend is likely to continue, according to Margaret Whitfield, an analyst with Sterne, Agee and Leach, who cited as proof a recent report that said the birth rate climbed 3% last year.

“People are having children later in life, and the first child is where you spend your bucks,” Whitfield said.

The popularity of high-end baby goods “is just a function of people having children later, when they are more established, and when they have more disposable income,” she said. “And of course we have multiple sets of grandparents because more people get divorced, so they are fighting to deliver the high ticket items to the baby.”

Younger parents are now spending three to four times as much on apparel as did their parents.

“J. Crew, Pottery Barn -- they are now offering children’s goods because there is such a strong market for high-end apparel and luxury accoutrement for kids,” Whitfield said.

Bugaboo Strollers, the Amsterdam-based retailer of luxury strollers, offers products ranging in cost from $599 for a “Bee” to $899 for a “Chameleon.”

“Parenting is an emotional category, it has a lot of emotions about wanting to offer the best for your child, and there is a price tag that goes with that,” said Kari Boiler, a spokesperson for Bugaboo. “With more women in the work force, women and men are having children at a later date, and they have comfort in making decisions, esthetically, and in the way they travel.”

Parents planning to have more than one child shouldn’t shy away from the hefty price tag, Boiler said, as a Bugaboo is a “one time investment, that can last for two or three kids, and even be passed on to multiple families.”

When asked whether or not it really matters what kind of stroller one uses, Boiler likened it to footwear. “If you have a bad pair of shoes, you’re miserable. We have suspension in our wheels that can take all the jarring out of a baby’s ride.”

At Valley, Pennsylvania-based BabyandMeBoutique.com, owner Michael Wilson said it doesn't really matter what kind of stroller your baby rides in, and the luxury baby market is growing due to parents’ fears of overseas recalls.

“It is not all about being expensive. It is more about quality, and many times the price points are higher,” Wilson said. “Parents are more concerned with safety and convenience than status,” he said, although he agreed that parents seek to be more fashionable than they did 10 or 20 years ago.

 

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