MICHEL PIREU: Better aim for an appropriate return than worry about alpha or beta
The obsession with benchmarking can change you into a new species, Homo Ovinus
Alpha and beta are two key coefficients in the capital asset pricing model used in modern portfolio theory. An asset’s exposure to unsystematic risk is measured by its beta (β), indicating whether it is more volatile than the market or less. The excess return of an investment relative to the return of a benchmark index is the investment’s alpha (α).
“A practical way of thinking about beta is that it’s the kind of return that you can get on demand,” says Theodore Enders, portfolio strategist at Goldman Sachs Asset Management. “Alpha is more complex, because it can be identified only with hindsight.”