Measuring performance – alpha and beta revisited

In Chapter 9, Trading Strategies and Their Core Elements, we touched on two important concepts that are mainly used to analyze performance: alpha and beta. Back then, we looked at them from a slightly different angle: we were in search of opportunities to systematically make profits in the market and considered all these metrics only from that standpoint. However, don’t forget that they were originally suggested for evaluating the performance of an investment – if put in simple words, to judge whether the investment outperforms or beats the market or not.

Note

I will intentionally simplify the concepts of both alpha and beta and avoid exact mathematical formulae for their calculation. Using them requires good command of the theory of probabilities, and I know from my past experience that it’s the very domain of mathematics that causes a lot of confusion to many readers. So forgive me, math purists, but...