IT MAY BE ALL GREEK TO YOU
In the Greek alphabet, alpha comes before beta. In investing alpha usually exceeds beta.
Alpha is a measure of the buying pressure of the stock that is independent of the overall market forces. It doesn't matter if it is related to the company's strong fundamentals, or if it's just a short covering rally. High alpha stocks tend to rise even when the whole market falls, and therefore it's a very desirable attribute for a stock.
Beta is a mathematical term that measures how the stock moves relative to an index (e.g. S&P 500). The higher the beta, the more volatile it is against the index. For example, a stock that goes up 20% while the index goes up 10% will have a beta of 2.00, while a stock with beta 1.20 means that the stock will go up or down 20% more than the index. When you see a beta less than 1.00, it means that the stock is less volatile than the market. If the stock moves exactly as the market does, the beta of it will be 1. Therefore, stocks with low beta carry less risk.
Now knowing this, you need to take a look at your portfolio and see what percentage of your portfolio is alpha and what percent is beta. If you have a portfolio that is more alpha it may mean you have a portfolio that may or may not move in the same direction as the stock market. That is neither good nor bad. If you have a portfolio full of high betas you will have a volatile portfolio. This is not good on the downside but very profitable on the upside. Low Beta means less volatility than the overall market.
It all comes back down to you, the investor. What is your risk tolerance? Having a diverse portfolio a mixture of both high alphas and betas would not only give you some protection against a fall but the exposure to benefit from an upside move. Check your portfolio and see where you stand.
The problem with betas and alphas are that they are backward looking, meaning they are based on historical data. Therefore, blindly following these numbers without thought can cause disaster.
Keep learning and have fun!
