• : April 18, 2021
  • : Prashant Shah

Alpha, Beta and Volatility

We have recently added a new feature in Smart scanner section. Alpha, Beta and Volatility scanner.



It shows various statistical measures of the stocks in the universe. Below is an explanation.

Period:

Select the date from which you need to check the Alpha, beta, volatility, net return etc for each instrument. End date is always a current date.

Benchmark (Scrip 2)

Instrument against which we compare the performance of stocks or other scrips. Usually, it is Nifty.

Alpha

In simple words, instruments giving returns better than the benchmark are having good Alpha.

Beta

Beta is a measure of volatility. Statistically, covariance divided by variance is Beta. To put it in simple words, Beta of more than 1 shows that stock is more volatile than the benchmark. Beta less than 1 shows stock is less volatile than the benchmark. Using this column, we can easily sort stocks having high or low beta and compare it with Alpha.
High Alpha and Low beta is an ideal scenario. Traders might like to seek breakout in high beta stocks.

CAPM (Capital Asset Pricing Model)

CAPM calculates the cost of equity funding and helps in determining the expected rate of return relative to perceived risk.

CAPM = Risk free return + (Beta x Market risk premium)

The goal of the CAPM formula is to evaluate whether the stock is fairly valued when we compare its risk and time value of money to its expected return.

In simple words, it is used to calculate the asset’s expected return versus the systematic risk involved. It is a simple tool to measure expected return over the risk for the stock. Higher the CAPM, better it is.

Risk free return can be changed by the user in the scanner to calculate the CAPM.

Correlation

Correlation shows how much a stock movement is correlated with the benchmark. Correlation of 1 shows positive correlation, and correlation of zero shows no correlation between the instruments.

Return


Return column shows the return that the stock has given over the user-defined period.

Volatility

Standard deviation and ATR% are two popular tools to calculate volatility.
Standard deviation: We calculate mean or average of a stock price over last n period. Let’s say 20 days. For example, average price of last 20 days is 200 points and its standard deviation is 5 points. It means that 66% of prices for 20 days were within 5 points. 95% of prices were within 10 points (2-standard deviation) and more than 99% prices were within 15 points (3-standard deviation).

In the scanner, we can calculate the standard deviation for any period for all instruments.

Same way, we can calculate ATR% for each instrument. It calculates the average of true range for the stocks (Max of difference between high and low price, high and previous close and low and previous close) for the mentioned period and coverts it into percentage numbers for better comparison.

Net Return (R-V)

Return of the stock minus volatility is the net return of the stock. If stock A is giving 10 % returns with 5% volatility, net return would be 5%. If a stock B is giving 15% returns with 12% volatility, net return would be 3%. Stocks giving better returns over volatility can be sorted using this column.

Performance (Net Return)

Performance of stock compared to benchmark for Net return is shown in the performance column. It shows which stock is producing better returns over volatility over benchmark index in the universe.

Scanner

I run the scanner for Nifty 50 stocks with Nifty as Benchmark from period 1st Jan 2021. Sorted the stocks with Performance column.

Below are the top 5 stocks in the universe.



As explained above, performance column explains return over volatility compared to benchmark. We can also check Beta and CAPM of the stocks in the universe.

With this scanner, you can check Alpha, Beta, Standard deviation, CAPM, Net return and Net return Performance against benchmark for all stocks in the universe at a single click.