Investment experts very often refer to “alpha”. What does it mean and how can one use this in his/her investment strategy? Let us explore this topic.
Alpha basically refers to the amount by which your investment exceeded or under-performed the benchmark index. For example, if you invest in Indian equity market, you might use the Nifty or Sensex index as your benchmark. If the Nifty was up 10% for a given period of time and your portfolio was up 15%, your alpha would be +5. On the other hand, if your portfolio was up just 6% as compared to 10% upside on the Nifty, your alpha would be -4. Alpha is basically the amount by which your portfolio return lags or beats a benchmark index with similar risk profile.
Investors in Alpha stocks argue that people can beat the indices quite regularly. To make this easy for investors, NSE has created CNX Alpha index
CNX Alpha Index measures the performance of stocks listed on NSE with high alphas. It is a well-diversified 50 stock index accounting for 12 sectors of the economy aims to measure the performance of securities listed on NSE with high Alphas. In order to make the 50 stock index investible and replicable, criteria’s such as turnover and market capitalization are applied while selection of securities. . The review of Alpha Index is carried on quarterly basis. Refer to the link for list of Alpha Index stocks
NSE alpha index has correlation of 0.87 with Nifty over 5 years. The alpha index is dominated by stocks from Pharma, IT, Automobile, Consumer Goods and Telecom sectors; these stocks makes more than 75% weight of the index.
Also Read : Return Evaluation Standards
We see from chart 1 that both Nifty and Alpha index has generated almost equal return over last one year. However, table 1 clearly indicates that alpha index generates superior return as compared to the Nifty index. So what are you waiting for? Its time to generate alpha!!!