Author: shyam

Alpha, Beta, Sharpe and Information Ratio

ten-year returns

Image via Wikipedia

StockViz now had alpha, beta, Sharpe and information ratio values available for individual stocks. The calculations are done daily using 1 year’s worth of historical data.

“Alpha” is a measure of a manager’s skill by measuring the portion of the managers returns that are not attributable to “Beta”, or the portion of performance attributable to a benchmark. This is how “better” a stock is relative to owning the index (Nifty 50) outright.

“Beta” is similar to correlation. By definition, the market itself has a beta of 1.0. A stock whose returns vary more than the market’s returns has a beta whose absolute value is greater than 1. A stock whose returns vary less than the market’s returns has a beta with an absolute value less than 1.

The “Sharpe” ratio tells us whether a portfolio’s returns are due to smart investment decisions or a result of excess risk. The greater a portfolio’s Sharpe ratio, the better its risk-adjusted performance has been. A negative Sharpe ratio indicates that a risk-less asset would perform better than the security being analyzed.

“Information Ratio” relates the degree to which an investment has beaten the benchmark to the consistency with which the investment has beaten the benchmark.

Read the returns series here.

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Returns on Reliance

RIL Logo

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We had discussed how risk and return are two sides of the same coin (read the series here). Also, we looked at the high price correlation of Reliance vs. the Nifty 50 index. The question yet to be answered is this: given a choice between owning Reliance and owning the NIFTYBEES ETF, what should an investor do?

Lets look at the pros of owning the NIFTYBEES:

  1. The NIFTYBEES represent the broader market. Investors get a diversified, market-weighted portfolio.
  2. 8.73% of the NIFTYBEES is, in fact, Reliance. So investors do get a slice of exposure to Reliance.

Now what would be the disadvantages of owning the NIFTYBEES vs. owning Reliance outright?

  1. If Reliance out-performs the index, then investors only get a small (8.73%) of the increase
  2. Investors may not want to buy the entire index and might prefer a concentrated portfolio of just resource stocks, of which Reliance is one.

To answer this question, lets turn our heads to two measures: alpha and beta (discussed here.) Reliance has an alpha of -0.0002946529 and a beta of 1.027928. What this shows is that Reliance actually underperformed the index (a –ve alpha) and it more or less tracked the index (a beta close to 1; confirmed by our correlation study.)

We are in the process of rolling out alpha and beta of individual stocks against the Nifty 50 index. Stay tuned!

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Is this going to 2011 all over again?

Has the market risen too fast too soon? It feels like only yesterday that all the “green shoots” talk from the US drove Nifty to overbought conditions. And then nothing happened. Europe took center stage and the drama there still continues. Are we talking about “brown shoots” now?

We had the same sort of bullishness in early 2010 and 2011 as well. And we are yet to reach those levels again.

niftybees

I think its time to be nervous.

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Time to let the Maharaja die?

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There comes a time in every Government run business where tough choices can no longer be avoided. Has time come to bury Air India?

Why does a piss poor country like India need a publicly financed airline when there are plenty of private players who are more than capable of filling in?

 

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We spend more on keeping Air India alive than we spend on Rural Infrastructure. Where are our priorities?

 

 

 

 

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We seem to think that Rs. 22 a day is enough for a person to live in rural India. But nobody questions as to why every Indian is expected to take on Rs. 577 of AI’s debt?

 

 

 

 

Given the succession of scams, it appears that we have developed a high tolerance to our government flushing our tax dollars down the drain. To paraphrase the French: The Maharaja is Dead, Long Live the Maharaja. Shut down Air India.

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The Dividend Announcers Club

We love dividends at StockViz. In fact, if dividend were to be a girl (or a boy), we would’ve sent her a box of chocolates today. We are constantly on the lookout for new companies that announce dividends. There have been none so far this year, but here’s a handy chart to give you an idea of the number new dividend announcers by year

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When a company announces dividends, we take it as a sign of confidence from management that it can fund its growth through internal cashflows and has some left over to pay out as dividends.

You can use our screener to hunt for these gems and more!

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