Alpha and Beta: The Romulus and Remus Investment Twins

A Raymond Randall
 


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Romulus and Remus are the eponym of Rome as Alpha and Beta are the eponym of investing. Romulus and Remus are the mythical twins of Rome; Alpha and Beta are the non-fictional twins of asset management. Story tellers tell us that Romulus and Remus were suckled by a wolf. Analysts tell us that investors get chased by a bull (a lot of “bull") and a bear.

Twins possess sibling personality with individual distinctions. Such is the case for Alpha and Beta. Alpha says, “It's all about me. " Alpha goes its own way with selfish interests. Alpha does not care much about the crowd it travels with. Alpha gets measured by unique qualities.

* Investment jargon defines Alpha as A measure of a stocks price fluctuation

* Price change/fluctuation reflects corporate earnings increases

* Earnings momentum: it's all about money, corporate earnings

* Price momentum: a stock or group of stocks increase value above market or index averages

* A stock with an alpha of 1.10 may increase 10% annually above the broad market

Ever play “Where's Waldo?" Finding Alpha is the same. Analysts love the search. Waldo hides in a maze of images. Stocks with alpha potential hide within a stock index. Essentially, a money manager must identify alpha, buy the stock, and sell it before it loses its alpha momentum. None too easy!

Beta is the other twin. Much more sensitive than Alpha. A stock with a high beta becomes downright indignant and emotional. A beta of 1.5 means the stock price will fluctuate 50% more than a market index. A stock with a low beta possesses a reserved nature. It just follows the crowd.

* Investment jargon defines Beta as Beta measures a stocks up or down movement against a family or index of stocks

* Low beta suggests low risk, and high beta says, “I'm emotional or volatile. "

* Beta likes company; it finds relevance in a group of stocks rather than by itself.

* Portfolios with high beta have more risk

Seems to me that Alpha is the first born of this pair. Alpha exhibits self-confidence and self-assurance. Alpha likes bucking the trend; Beta seems to either get upset or bored. Despite such eccentricities the Romulus and Remus investment twins do what they are made to do: they measure stock and portfolio risk and return.

"Never spend your money before you have it. " - Thomas Jefferson, 3rd president of US (1743 - 1826)

Ray Randall serves clients as a registered investment advisor with his firm, Ethos Advisory Services, Essex, Massachusetts Ethos Advisory Services. He has wide experience within the financial services industry, writes a weekly newsletter for Ethos Advisory Services http://www.ethosadvisory.com and coordinates the developments at Echievements.com. Ray holds a Masters Degree from Gordon-Conwell Theological Seminary, Hamilton, MA. You may call Ray (617-275-5565).

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