Alpha: Calculate, Find & Profit from High-Alpha Stocks

Alpha measures how a stock, fund, or asset performs versus its benchmark index. If a stock portfolio earned 10% on the year while the corresponding benchmark gained 6%, the alpha would be 4%. A positive alpha means the fund outperformed its benchmark, while a negative alpha implies it underperformed.

Building a high alpha portfolio is the coveted objective for hedge fund managers. If you invest in growth stocks, it should be your goal as well. This article shows you how to find high-alpha stocks and implement your alpha calculator in Excel.

What is Alpha?

Alpha measures a stock, fund, or asset’s performance relative to its benchmark. It is often expressed as a percentage. For example, if an investment increases in value by 10 percent but the market benchmark increases by 5 percent, then the alpha would be +5%.

Alpha measures how much an investor’s portfolio outperforms or underperforms the market. Alpha is a useful metric for understanding the return that an investor earns beyond what would be expected by taking on additional risk.

What is alpha in stocks?

Alpha is a measure of the return that an investor earns beyond what would be expected by taking on additional risk. By understanding how alpha works, investors can identify and invest in stocks with higher-than-average returns while minimizing their risk exposure.

Alpha is an important concept in stock investing. It measures how much a particular stock or mutual fund outperforms or underperforms the market while considering risk and volatility.

How to Use Alpha in Stocks

Using alpha can be a great way to increase returns while reducing risk. By analyzing and ranking stocks based on their alpha performance, investors can make more informed decisions about which stocks to invest in. This data can also be used to evaluate the performance of a portfolio or fund manager, as higher alpha indicates that the manager is beating the market on a risk-adjusted basis.

It’s important to note that alpha can effectively identify suitable investments, but it does not always indicate future stock performance.

What does alpha mean in stocks?

Alpha measures the risk-adjusted performance of a particular stock or mutual fund. In other words, it considers the volatility of a security’s returns relative to the market. This makes alpha a more accurate measure of investment performance than simple returns alone.

There are a few ways to calculate Alpha: one is to use historical data to track how a stock or mutual fund has performed relative to the market over time. Another way is to use beta, which measures a security’s volatility relative to the market. Finally, you can also calculate alpha using regression analysis.

How to use alpha for stock picking

Alpha can be used in two ways: to help investors choose stocks or mutual funds that have the potential to outperform the market and to help investors assess how well their current investments are performing.

Generally, stocks or mutual funds with high alpha are considered riskier but also have the potential for higher returns. Investors should exercise caution when investing in securities with high alphas, as they can be more volatile than the market as a whole.

How to find high Alpha stocks

To find high Alpha stocks, use a stock screener to filter for stocks that have outperformed the S&P 500 index over the past 12 months.

Alpha measures asset price performance vs. the underlying index, so finding these stocks is easy using Stock Rover.

5 Steps to Quickly Find High Alpha Stocks

1. Register for a Free Stock Rover Trial
2. Select Screeners -> Create New Screener -> Add Criteria
3. Type “1-Year Return vs. S&P 500”> 5% (5% represents the additional risk-free rate of return)
4. Click “OK.”
5. You will now have a list of approximately 800 stocks with a high 12-month Alpha.

List of 35 High Alpha Stocks for 2023/2024

Here is a list of the 35 best high alpha stocks selected by the Liberated Stock Trader Beat the Market System.

The Liberated Stock Trader Beat the Market (LSTBTM©) strategy excels at identifying the top 35 growth stocks with a high probability of outperforming S&P500 returns. This meticulously engineered system evaluates the growth in free cash flow and explosive EPS growth. Combining these factors with Joel Greenblatt’s celebrated ROC and Earnings Yield formulas, also known as “the Magic Formula,” we present a carefully curated selection of stocks consistently outperforming the market in 8 out of the past nine years.

*Alpha = 1-Year Return vs. S&P 500

Of course, this selection of stocks, like any strategy, does not guarantee market outperformance, but it does improve the chances of high performance in the future.

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How to calculate risk-adjusted alpha in stocks

Alpha measures how well a particular stock or mutual fund does compared to the market. You can calculate it in different ways, but usually, you use historical data or beta. Alpha can help you choose stocks that have the potential to do better than the market, and it can also help you see how well your current investments are doing.

What is a good alpha for a stock?

A good alpha for a stock is anything above zero. This means that the stock has outperformed its benchmark. Ideally, you want to find stocks with alphas that are as high as possible since this indicates that they have the potential to generate higher returns than the market average.

A stock with an alpha of 1 or higher is considered a good investment. This means that the stock has outperformed the market by at least 1% over a period of time.

 

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How to calculate the alpha of a stock

There are two ways to calculate alpha:

The simplest way to calculate alpha is to subtract the market return from the stock’s or mutual fund’s return. For example, if the market returned 12% last year and your stock portfolio only returned 11%, your alpha would be -1%.

The second way to calculate alpha is to compare the risk-adjusted returns of a stock or mutual fund to its benchmark index. Risk-adjusted returns consider factors such as volatility, which can impact a security’s performance. A higher risk-adjusted return indicates that a security has outperformed its benchmark index after considering these risk factors.

What is a risk-adjusted return?

A risk-adjusted return measures a security’s performance that considers the risk associated with that security. It is used to compare the risk-adjusted returns of different securities to see which one performed better after accounting for the amount of risk they each carried.

The risk-free rate of return

The risk-free rate of return is typically taken to be the return of US treasuries. US 10-year treasury bonds are considered a risk-free investment, yielding 4% per year. So, calculating any risk-adjusted return, you need to subtract 4% from the assets return.

There are two ways to calculate risk-adjusted returns:

The Sharpe Ratio

The Sharpe Ratio takes the asset’s return, subtracts the risk-free rate, and divides the result by the asset’s standard deviation. This measures how much more return you are getting per unit of risk by investing in that particular security.

The Sortino Ratio

Similar to the Sharpe ratio, the Sortino ratio measures the reward-to-risk ratio of an investment. However, instead of taking into account the overall volatility (standard deviation) as a measure of risk, it only considers the downside volatility. This makes it more accurate at measuring true risk and better reflects investors’ goals: maximizing returns while minimizing drawdowns.

Jensens Alpha

Jensen’s Alpha measures the alpha an investment manager generates after adjusting for the risk associated with a specific asset. It also considers the volatility of markets and compares it to the expected return on a portfolio or mutual fund. Like the Sharpe ratio, Jensen’s Alpha indicates whether an investor is earning additional returns above what would be expected given the risk taken.

A positive Jensen’s Alpha means the manager has generated additional returns over those expected. In contrast, a negative Jensen’s Alpha suggests that the investor is underperforming relative to what would be expected given the amount of risk taken.

How to use alpha for investing

There are several ways to use alpha when making investment decisions. One way is to use it as a measure of risk-adjusted returns. This can help you identify stocks or mutual funds that have the potential to generate higher returns than their benchmark indexes after taking into account risk factors.

Another way to use alpha is to compare the performance of different stocks or mutual funds within the same asset class. For example, if you compare two stock portfolios, the higher alpha will likely be the better performer.

Finally, you can use alpha as part of your overall investment strategy. For example, you might allocate a certain percentage of your portfolio to stocks or mutual funds with high alpha to generate higher returns.

Generally, a stock or mutual fund with a high alpha has the potential for higher returns. Investors should exercise caution when investing in securities with high alphas, as they can be more volatile than the market as a whole.

How to calculate the alpha of a stock in Excel

To calculate the alpha of a stock in Excel, you can use the following formula:

Alpha = ((Portfolio Return% – Risk Free Rate of Return%) – Beta * (Benchmark Return% – Risk Free Rate of Return%)

	A	B
1	Alpha = 8.8%	=SUM((B2-B4)-B3*(B5-B4))
2	Portfolio/ETF Return	30%
3	Beta	1.10
4	Risk-Free Rate of Return (10-Year Treasury Yield)	8%
5	Benchmark’s Return	20%

Excel Formula & Calculation Table – Copy Highlighted Cells into Excel & It Works

Example: Calculating alpha for an ETF or portfolio

This example shows how to calculate the Invesco QQQ Nasdaq 100 ETF alpha.

	A	B
1	Alpha	3.7%
2	Portfolio/ETF Return (Invesco QQQ 3-Year Annual)	13%
3	Beta QQQ (3 Year)	1.07
4	Risk-Free Rate of Return (10-Year Treasury Yield)	4%
5	Benchmark 3-Year Return (S&P500)	9%

Excel Formula & Calculation Table for QQQ – Copy & Paste Highlighted Cells into Excel 

You can see that investing in the Invesco QQQ Nasdaq 100 index tracking ETF yields an expected yearly Alpha of 3.7% above the S&P 500 returns.

Example: Calculating alpha for Apple Inc.

This example shows how to calculate the Alpha for Apple Inc.

	A	B
1	Alpha	24.2%
2	Stock Return (Apple 3-Year Annual)	34%
3	Beta AAPL (3 Year)	1.17
4	Risk-Free Rate of Return (10-Year Treasury Yield)	4%
5	Benchmark 3-Year Return (S&P500)	9%

Excel Formula & Calculation Table for AAPL – Copy & Paste Highlighted Cells into Excel

Here, you can see Apple Inc. has an incredibly high alpha of 24.2%. This is because Apple’s stock price increased 34% per year with a Beta of 1.17, compared to the 9% of the S&P 500.

Alpha vs. beta in stock investing

Alpha and beta are two important measures that investors use to assess a stock’s risk. Alpha measures how a particular stock or mutual fund compares to the market, while beta measures how much a security moves in relation to the market.

When it comes to Alpha and Beta, there are a few things to keep in mind:

1. Alpha and beta can be positive or negative.
2. Alpha reflects the possibility of high stock price performance, while beta reflects the volatility of a security.
3. Alpha is used to calculate risk-adjusted returns, while beta is not.
4. Beta is more popular than alpha because it is easier to calculate.
5. Alpha should not be used as the only measure of a security’s risk or volatility.
6. Alpha and beta are important indicators for investors to consider when making investment decisions.
7. Most stock software contains Beta calculations but not alpha.

In summary, alpha measures how well a security performs compared to the market. Beta measures how volatile a security is relative to the market. Both Alpha and Beta are important factors to consider when making investment decisions.

 

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Why do investors seek alpha?

Investors seek alpha to generate higher returns than the market as a whole. Alpha measures how well a security performs compared to the market, so investors who find stocks or mutual funds with high alpha can expect to see better-than-average returns.

Additionally, alpha can be used to measure risk-adjusted returns, which can help investors identify securities that have the potential to generate higher returns than their benchmark indexes.

Conclusion

In conclusion, alpha is an important concept that all investors should be aware of. By understanding what it is and how to use it, alpha can improve your investment decisions and portfolio performance!

Thanks for reading! We hope this article gave you a better understanding of alpha and how to use it in your investment portfolio.

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