Alpha and beta are also related to the regression line. As Figure 23 illustrates, alpha is the Y intercept of the regression line. In other words, if the benchmark returned 0%, the Y intercept would tell us what the investment could be expected to return. In Figure 23, the alpha is 2.23%. That means if the benchmark returned 0%, we would expect our investment to return 2.23%.
Beta is the slope of the line and measures the volatility of a particular investment relative to the market as a whole. (Note: The market can be defined as any index or investment.) Beta describes an investment’s sensitivity to broad market movements. For example, in equities, the stock market (the independent variable) has a beta of 1.0. An investment with a beta of 0.5 will tend to participate in broad market moves, but only half as much as the overall market.
Investors who are required to select and monitor investment managers should develop a basic understanding of investment statistics. Quantitative tools can provide you with good insight that you can use in your qualitative interviews with managers and when monitoring your investments.