Alpha, Beta and Investing.....

To explain how alpha works, we need to start with beta. As you'll recall from our Risky Business series, beta is a volatility measure that quantifies the movements of a security relative to those of a benchmark index. In other words, given the movements of the benchmark, it tells you how much you can expect a fund to move. For example, let's consider a fund that has a beta of 1.1 in comparison with the S&P 500. If the index were to return 30% for the year, you would expect the fund to return 33%. (30% x 1.1 = 33%.) However, mutual funds don't necessarily produce the returns predicted by their beta values. That's where alpha comes in.