A belief in efficient markets spawned the creation of market capitalization weighted index funds that seek to replicate the performance of investing in an entire market in the weights that each of the equity securities comprises in the overall market. In fact, to many investors, [ citation needed ] this phenomenon created a new standard of performance that must be matched: an investment manager should not only avoid losing money for the client and should make a certain amount of money, but in fact should make more money than the passive strategy of investing in everything equally since this strategy appeared to be statistically more likely to be successful than the strategy of any one investment manager.
The name for the additional return above the expected return of the beta adjusted return of the market is called "Alpha". Besides an investment manager simply making more money than a passive strategy, there is another issue: although the strategy of investing in every stock appeared to perform better than 75 percent of investment managers see index fund , the price of the stock market as a whole fluctuates up and down, and could be on a downward decline for many years before returning to its previous price.
The passive strategy appeared to generate the market-beating return over periods of 10 years or more. This strategy may be risky for those who feel they might need to withdraw their money before a year holding period, for example.
Thus investment managers who employ a strategy that is less likely to lose money in a particular year are often chosen by those investors who feel that they might need to withdraw their money sooner. Investors can use both alpha and beta to judge a manager's performance. If the manager has had a high alpha, but also a high beta, investors might not find that acceptable, because of the chance they might have to withdraw their money when the investment is doing poorly.
From Wikipedia, the free encyclopedia. For other uses, see Alpha disambiguation. This article needs additional citations for verification. Please help improve this article by adding citations to reliable sources. Unsourced material may be challenged and removed. Main article: Beta finance. Financial markets.
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Hedge funds. Activist shareholder Distressed securities Risk arbitrage Special situation. The number of possible combinations is large, and you can find information on a variety of options strategies that use spreads. Spreads have limited risk and limited rewards. However, in exchange for accepting limited profits, spread trading comes with its rewards, such as an enhanced probability of earning money. The somewhat conservative investor has a big advantage when able to own positions that come with a decent potential profit—and a high probability of earning that profit.
Stock traders have nothing similar to option spreads. Options trading is not stock trading. For the educated option trader, that is a good thing because option strategies can be designed to profit from a wide variety of stock market outcomes. And that can be accomplished with limited risk. The Balance does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors.
Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal. Charles Schwab.
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