Explain alpha and beta in Capital Asset Pricing Model

Question

Explain the purpose of alpha and beta in Capital Asset Pricing Model.

Answer 1

The parameters alpha and beta are also commonly termed as in the hedge-fund world. Performance reports for trading strategies will frequently quote the alpha and beta of the strategy. This good strategy will have a high, positive alpha along with a beta close to zero. With beta being small you would suppose performance to be unrelated to the market as a complete and with large, positive alpha you would expect good returns either way the market was moving. The meaning of small beta a strategy should be a valuable addition to a portfolio due to its beneficial diversification.