Alpha is a crucial metric for investors who want to evaluate the performance of a stock or portfolio 🤓
If you're wondering how to calculate Alpha, you've come to the right place! 📌
The formula for calculating Alpha is Alpha = Actual Return - Expected Return OR Benchmark 🧮
But, what are actual, expected and benchmark returns? 🫤
First, we need to know what return is 🤔
💡Return = potential profit of a stock investment!
Return is only potential profit since you need to sell a stock to actually collect the real profit 🤑
So, any stock you hold remains as potential profit or “return” 📝
Actual Return = the investment's real return over a period 🤑
If you want to check the return of any stock on Bloom, you can open the stock and toggle the graph dates from 1D all the way to 5 Years or All Time! 🌹
Expected Return = the return that you or other investors were expecting or predicting 📈
In most cases, Alpha is calculated with a benchmark, like the S&P 500! 📊
So, the expected return would be the benchmark’s return 💡
🍋Imagine you're running a lemonade stand. On a hot summer day, you sell 50 cups of lemonade, which is your Actual Return 💰
You only expected to sell 25 cups of lemonade! 🥳
In this case, your Alpha is 50 - 25 = 25 cups of Alpha!! 💪
Now, back to the stock market 😎
Let's say Stock A has a return of 12% over a year, and the S&P 500 has a return of 10% over the same period. 📝
In this case, Stock A has an Alpha of 12% - 10% = 2% Alpha! 🥳
By mastering the art of calculating Alpha, investors can gain valuable insights into the performance of their investments and make informed decisions to potentially achieve higher returns. 💪
