Can you explain the concept of alpha and beta in investment analysis?

Sample interview questions: Can you explain the concept of alpha and beta in investment analysis?

Sample answer:

Alpha:

  • A measure of an investment’s excess return over and above the return that would be expected from a diversified portfolio with the same level of risk.

  • Positive alpha indicates that the investment has outperformed the benchmark, while negative alpha indicates that it has underperformed.

  • Alpha is often used to evaluate the performance of active investment managers, as it measures their ability to generate returns that are not simply due to the overall market performance.

Beta:

  • A measure of an investment’s sensitivity to changes in the overall market.

  • Beta is calculated by comparing the investment’s returns to the returns of a broad market index, such as the S&P 500.

  • A beta of 1 indicates that the investment’s returns are expected to move in line with the market, while a beta greater than 1 indicates that the investment’s returns are expected to be more volatile than the market.

  • A beta less than 1 indicates that the investment’s returns are expected to be less volatile than the market.

Relationship between Alpha and Beta:

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