What are alpha and beta in investing?

Alpha refers to the returns generated by an asset in excess to its benchmark index’s returns. For instance, if shares of an auto company rise by 10% in a month against an 8% rise in the benchmark Nifty Auto Index, it means the stock has generated an alpha of 2%. The higher the alpha of an asset, the better it is, and anything more than zero is considered to be a good alpha. On the other hand, beta is a parameter to evaluate an asset’s volatility compared to its benchmark index. A beta of more than 1 means that the asset is more volatile than its benchmark. Conversely, if it’s lower than 1, then it is less volatile than the benchmark. Together, these two metrics help an investor to understand the risk (volatility) and reward (higher returns) related to an asset.


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