Often when looking at a fund managers performance you’ll see three stats, the Alpha, the Beta and the Sharpe Ratio. Here’s the short definition of each:
Alpha – is the measurement of a fund’s actual return and its expected return given its beta. Alpha is the excess return given the risk taken.
Beta – the beta (β) of a stock or portfolio is a number describing the relation of its returns with that of the financial market as a whole.
Sharpe Ratio – is a measure of the excess return (or Risk Premium) per unit of risk in an investment asset or a trading strategy.
When selecting an investment adviser, hedge fund or some other form of money manager, take the time analyze their track record to ensure they are actually giving you an edge.
The most important indicator of the three is the Sharpe Ratio, the higher the better…
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