Alpha Beta and Smart Beta Investments

The Mixed Stock Price Index (IHSG) is an Indonesian capital market index. It can be used as a reference in estimating the movement of the overall capital market. However, there are stocks that move beyond JCI, but they also move in the opposite direction.

Long-term investors prefer stocks that are priced higher than JCI, while traders certainly prefer stocks that move more volatilely than JCI. bullish or bearish trend.

price movement and stock price volatility Compared to the standard index Often referred to as Alpha, Beta, and Smart Beta. Understand what Alpha Beta and Smart Beta are in the following articles:

Beta Definitions

Beta is an indicator that measures the sensitivity of an investment instrument’s price movements to changes in overall market conditions. For the meaning of this market condition It can be in the form of a benchmark index such as the JCI or a branch index used as a benchmark.

The optimal beta value is beta of 1, as this means that the asset’s price will fluctuate drastically with changing market conditions. If the beta is greater than 1, the movement of the company’s stock is more likely to fluctuate. (Easy to change) compared to the change in prices of other instruments.

Indirectly, beta also describes the level of risk in an investment instrument. This is due to the higher volatility of the investment instrument’s price compared to the underlying index. The higher the investment in these instruments, however, the beta does not indicate the direction of the trend. The beta will remain high even if the stock’s price rapidly rises above JCI or significantly below JCI.

For example, the beta of Stock A relative to the Sectoral Index is 1.2, which means that the price of these stocks tends to fluctuate more than 20% relative to the price fluctuations of other stocks. address in the same field This also means that if the value of the sectoral index increases by 10%, the price of Stock A will increase by 12%. Conversely, if the price of the sectoral index decreases by 10%, the price of Stock A is expected to decrease. also down 12%

Beta is often referred to as a coefficient in other literature. Beta calculations will be used later in alpha calculations. which is another term that will be discussed in the subchapter below.

understand alpha

Alpha is the difference between the value of the desired investment profit (expected return) with the value of the profit from the investment (real return). expected return Here it can be interpreted as a performance index which is used as a reference along with other considerations. Investment managers often use this term to assess the performance of their investment portfolios.

The base value of alpha is 0 because if alpha is 0, it means that the return on investment in the instrument is equivalent to the development of the index used as the underlying pseudonym. real payoff delete expected return equal to 0. Of course, good investors are looking for an investment manager with a positive alpha, because that means Actual return > Expected return.

For example, the price movement of an index mutual fund product increased by 10%, while the underlying index for the same period increased by only 5%, which means that the mutual fund product’s alpha value is positive, which is 5%.

instead of considering only the difference in returns A rational investor takes into account the level of risk and profitability of other investment products, so there is a theory of alpha calculation called Jensen’s Alpha. Jensen’s Alpha is calculated using the following formula:

Alpha = R(i) – (R(f) + β x (R(m) – R(f)))

information:

R(i) = actual return or profit from investment in related instruments

R(m) = expected return or change in the underlying index value.

R(f) = risk-free rate or return on investment in low-risk investment instruments such as government bonds or fixed deposits.

β = coefficient, or beta, or average sensitivity to changes in the price of investment instruments compared to benchmark indexes. As mentioned above Beta also represents the risk of investing in instruments.

For example, let’s say you invest in technology stocks with the following information:

R(i) of shares = 15%

R(m) of Technology Stock Index = 10%

R(f) also known as government bond coupon = 5%

β = 1.2%

Then the alpha value will be equal to:

Alpha = 15%- (3% + 1.2 x (10% – 3%)) = 0.0036

Share A’s price movement is slightly stronger than the technology index’s price movement. However, the Alpha value is based solely on past price movements. and cannot be used to predict future price movements for sure.

Understanding Smart Beta

Smart beta is an investment strategy that aims to increase returns and portfolio diversification. At the same time, it reduces the level of risk by taking advantage of factors that consistently push asset prices higher than the underlying index.

according to the old InvestopediaSmart beta is a combination of Active and passive investment strategies. It can be said that it actually works. This is because investment managers can manage their investment portfolios according to risk and cost. But it can be called passive because the investment manager is linked to a previously agreed portfolio arrangement. Therefore, balancing needs to be adjusted more often. in general This smart beta strategy will be implemented in exchange-traded funds (ETF).

Using Alpha, Beta and Smart Beta to Invest

You can use high or low beta to choose an investment instrument that fits your risk profile. For example, high-risk investors tend to choose investment instruments with low beta. Stocks with a high beta because they seek to profit from fluctuations in asset prices.

On the other hand, you can use alpha values ​​to compare investment tools that offer similar returns. For example, you’re confused about choosing Stock A or Share B because they both have the same return, 15%. Based on the beta, stock B has a coefficient of 1.1, so stock B’s alpha is:

Alpha = 15%- (3% + 1.1x (10% – 3%)) = 0.0133, which means that Stock B is relatively safer and more profitable than Share A. However, both Beta and Alpha are value-based. only in the past and cannot be used to accurately predict future price movements.

What about Smart Beta? You can choose investment managers or ETF products that use smart beta strategies. If you are interested in investing in instruments that combine both active and passive investment methods.