Does alpha account for risk?

Alpha, as a measurement focus, is centered on evaluating the performance of an investment in excess of its expected return, taking into account the level of risk associated with it. This metric assesses how well an investment has done in comparison to what was anticipated given its risk profile.

A low beta value, on the other hand, suggests that an investment's returns are less volatile and less influenced by market movements. Such investments may be appealing to risk-averse investors who prioritize stability over high returns.

Conversely, beta measures the responsiveness or sensitivity of an investment's returns to fluctuations in the broader market. It provides insights into how closely an investment's performance aligns with that of the overall market, indicating its level of market risk.

In addition to alpha and beta, investors also consider other factors such as costs, liquidity, and diversification when evaluating investments. However, alpha and beta remain crucial metrics for assessing an investment's performance and risk exposure.

Investors often consider both alpha and beta when making investment decisions as they offer distinct yet complementary perspectives on an investment's potential return and risk. Alpha highlights the investment's ability to generate additional returns above and beyond its expected level, while beta reflects its exposure to market volatility.