Weighted Alpha - Explained
What is a Weighted Alpha?
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Table of ContentsWhat is a Weighted Alpha?How Does a Weighted Alpha Work?Weighted Alpha CalculationWeighted Alpha Inferences
What is a Weighted Alpha?
In investment market, a weighted alpha evaluates the price of a stock over a year. The performance measured is in relation to the increase and decline in the price of the stock. Typical, an alpha indicates the performance of a security or stock over a period of time, the price movements of a stock for a fiscal year is measured using the weighted alpha. Oftentimes, technical analysts use the weighted alpha to depict how much the price of a particular stock has risen and fallen in a period of one year.
How Does a Weighted Alpha Work?
The price movements of stocks over one year are measured using the weighted alpha. The weighted alpha is of importance not only to technical analysts ut also to investors. When there is an upward movement on the price of a stock, there is a positive weighted alpha. Downward movement in a stock price however reflects that the weighted alpha is negative.
Weighted Alpha Calculation
To calculate the weighted alpha of a stock, the formula below is applicable;
Weighted Alpha = [ Sum of (Weight x Alpha) ] / 365
The weighted alpha of a stock is calculated per annum, attention is placed on the return on the stock for one year. A higher return on stock gives a positive weighted alpha while a negative weighted alpha indicates that the stock has low return for that year. Since different technical analysts have different devices and software used in calculating a weighted alpha, different standards or preferences can be adopted while calculating it, the goal of the calculation is to reveal the price trends of a stock for a year.
Weighted Alpha Inferences
There are many important points and signals that can be inferred from weighted alpha. Ultimately, the first inference from weighted alpha is buy and sell signals, it signals the appropriate time to buy or well in the market. Also, investors and companies that have accumulated mush return on stock over a period of time know this using the weighted alpha, so also companies that generated diminishing returns. A positive weighted alpha shows a bullish trend while a negative one shows a bearish trend. However, it is possible to have a stock that experienced both bullish and bearish trends in an equivalent proportion, this is also revealed through the weighted alpha.