if I were to tell you that a stock hs a significantly positive alpha but and...

if I were to tell you that a stock hs a significantly positive alpha but and extremely high beta, is this still stock a good one to own ? why or why not?

Expert Solution

Hello Sir/ Mam

Alpha is a risk-adjusted return.

What this means is that it is the return over and above the market expectations.

It is calculated by subtracting the return anticipated by beta from the actual returns and hence, however large beta may be, alpha is the return over and above the return expected from that beta.

Hence, the stock with positive alpha is a good buy.

However, neither beta nor alpha can predict the future returns and hence, if someone is looking to buy a stock just looking at the history of alpha and beta, he shouldn't purchase that stock.

In short, if you held the stock and it generated positive alpha, it was a good buy, buy one should not buy a fresh position in a stock with positive historical alpha and extreely high beta.

I hope this solves your doubt.

Do give a thumbs up if you find this helpful.

jeff jeffy answered 11 months ago

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