Alpha and beta – widely used, widely confused
If you have ever read any article or book on algo or systematic trading or just ever listened to CNBC, most likely you have already heard about alpha- and beta-generating programs (strategies, systems, funds, you name it). And as is quite often the case with heavily used terms, not everyone who uses them really understand their meaning. Let’s shed some light on this terminology, as understanding it will really help sort out the kaleidoscopic variety of trading strategies.
Alpha – earn from changes in price
According to the general definition of alpha (which you can find, for example, at InvestmentU – https://investmentu.com/what-is-alpha-investing/), alpha (α) “is a specific measurement of the worth of an investment based on its performance relative to the market. Specifically, alpha measures the ability of an investment to beat market returns.”
Sounds familiar? Most likely yes if...
