What is Portfolio's Alpha?
Posted on . 1 min read
Is my stock portfolio doing better than S&P 500? 🤔
The simple answer is to check if your portfolio's annual returns are more than S&P 500's annual return. But this approach doesn't consider the risk you took by investing in direct stocks.
So the question now is whether are you rewarded enough for the risk taken? For that, you should know your portfolio's Alpha.
So, What is Portfolio Alpha (α)? 🧠
Alpha in general is a measure of your portfolio's ability to beat the market. It is the excess return your portfolio can generate on top of the expected return for the risk undertaken.
Alpha is usually represented as a single number like +2 or -4. This means your portfolio has performed 2% better or 4% worse than the expected returns.
If α > 0, then your portfolio is doing better than expected. 🤑🤑
If α = 0, your portfolio is meeting the expectation. You can try to improve it by optimizing the portfolio.💰💰
If α < 0, your portfolio is doing worse than the expectation. You can switch to an Index Fund/ETF instead or you can try to improve it by optimizing the portfolio. 🙆🙆
How to calculate Alpha (α)?
Don't worry, that's on us! :) 🚀 Check Xillion Portfolio Analyzer 🚀