Alpha and Omega in Mutual Funds
Alpha tells you if fund has produced returns justifying the risks it is taking
Alpha tells you whether the fund has produced returns justifying the risks it is taking. It does this by comparing its actual return to the one 'predicted' by the beta. Say, a fund can be expected to earn a return of 15 per cent in a year (based on its beta). However, it actually fetches you 18 per cent. Then the alpha of the fund is 3 (18 - 15 = 3). In other words, alpha is a measure of selection risk (also known as residual risk) of a mutual fund in relation to the market. A positive alpha is the extra return awarded to the investor for taking a risk, instead of accepting the market return.
http://www.valueresearchonline.com/story/h2_storyView.asp?str=10351
That's why index funds always have-or should have, if they track their benchmark index perfectly-an alpha of 0.
http://www.valueresearchonline.com/story/h2_storyView.asp?str=23335
Alpha tells you if fund has produced returns justifying the risks it is taking
Alpha tells you whether the fund has produced returns justifying the risks it is taking. It does this by comparing its actual return to the one 'predicted' by the beta. Say, a fund can be expected to earn a return of 15 per cent in a year (based on its beta). However, it actually fetches you 18 per cent. Then the alpha of the fund is 3 (18 - 15 = 3). In other words, alpha is a measure of selection risk (also known as residual risk) of a mutual fund in relation to the market. A positive alpha is the extra return awarded to the investor for taking a risk, instead of accepting the market return.
http://www.valueresearchonline.com/story/h2_storyView.asp?str=10351
That's why index funds always have-or should have, if they track their benchmark index perfectly-an alpha of 0.
http://www.valueresearchonline.com/story/h2_storyView.asp?str=23335
Absolute and annualised returns
'Annualised' returns are simply the annual gains that an investment has earned over a specific period of time. The difference between absolute and annual returns can be best explained with an example. If an investment of Rs 1,000 grows to Rs 1,300 over five years, then Rs 300 is an absolute gain with 30 per cent growth. This 30 per cent return is absolute return.
Annual (annualised) returns show the average gains that the investment made each year in this five-year period, if the gains were reinvested every year. In this case, the annual returns work out to 5.38 per cent. Assuming that the money grew at a constant rate, the investment of Rs 1,000 would have grown to Rs 1,053.80 by the end of first year. In the second year, it would be Rs 1,110.50 (by adding 5.38 per cent of Rs 1,053.80) and so on till the fifth year until it appreciates to Rs 1,300.
All investment instruments at Value Research state returns of less than a year in absolute terms, and over one year as annualised percentage.
