Alpha: the excess return of the portfolio, which shows the ability of the manager; Beta: Market risk, initially mainly refers to the systematic risk or return of the stock market. In other words, the one who beats the market is called Alpha, and the one who follows the market is called Beta. In 1980s, everyone's cognition was based on CAPM model, which was divided into beta (completely related to benchmark) and alpha (irrelevant to benchmark). In the 1990s, people were no longer confined to the single factor of the market. APT model and Barra multi-factor model expand the range of factors that people choose, including regional/industrial factors.

Calculating β coefficient with simple formula

1. Determine the risk-free interest rate.

This is the expected rate of return of investors in risk-free investments, such as US Treasury bonds invested in dollars and German government bonds traded and invested in euros. This figure is usually expressed as a percentage.

2. Determine the stock return rate and the market (or representative index) return rate respectively.

These figures are also expressed as percentages. It usually takes several months to calculate the rate of return.

3. Subtract the risk-free interest rate from the stock yield. If the stock yield is 7% and the risk-free interest rate is 2%, the difference between them is 5%.

When calculating the beta coefficient, the representative index of the market where the stock to be calculated is usually (though not necessarily) used. Standard & Poor's 500 is a frequently used index for American stock market, but it is best to use Dow Jones Industrial Average when analyzing industrial stocks. For internationally traded stocks, MSCI EAFE (representing Europe, Australia and the Far East) is a suitable representative index. For China A shares, you can use the Shanghai Composite Index.

4. Divide the difference between stock yield and risk-free interest rate by the difference between market (or index) yield and risk-free interest rate.

Get the beta coefficient, usually expressed in decimal. In the above example, the beta coefficient is 5 divided by 6 to get 0.833. According to the definition, the beta coefficient of the market or its representative index itself is 1.0, because if the market is compared with itself, the result of dividing any non-zero number by itself is equal to 1. Beta coefficient less than 1 means that the volatility of the stock is lower than that of the whole market, and beta coefficient greater than 1 means that the volatility of the stock is higher than that of the whole market. Beta coefficient can be less than zero, indicating that there is a loss in investing in the stock, but the market as a whole is profitable (more likely); Or invest in the stock to make a profit, but the market as a whole loses money (this is less likely).