{"id":9070,"date":"2014-01-29T06:31:53","date_gmt":"2014-01-29T11:31:53","guid":{"rendered":"http:\/\/goldstocksforex.com\/?p=9070"},"modified":"2014-01-29T06:31:53","modified_gmt":"2014-01-29T11:31:53","slug":"how-i-can-explain-96-of-your-portfolios-returns-seeking-alpha","status":"publish","type":"post","link":"https:\/\/thepatientinvestor.com\/index.php\/2014\/01\/29\/how-i-can-explain-96-of-your-portfolios-returns-seeking-alpha\/","title":{"rendered":"How I Can Explain 96% Of Your Portfolio’s Returns | Kiran Pande"},"content":{"rendered":"

Great article from Kiran Pande:<\/p>\n

\n

Since the 1960s, we’ve been dependent on a model called CAPM (capital asset pricing model) to understand the relationship between risk and return, despite the fact that its measure of risk only explains about 70% of return. This measure, beta, makes the assumption that the entirety of every stock’s return is due to its exposure to the market. Put simply, every stock’s returns will equal a factor of the S&P 500’s returns. Thus, if a stock’s beta is 2.0, it will double the S&P 500’s returns on a bull day and double its losses on a bear day. Obviously, this assumption is wrong almost every day, but the idea is that this factor is explaining most of a stock’s returns.<\/p>\n

All returns not explained by beta in the CAPM model are called alpha. This is traditionally accepted as the level of skill and value added by a portfolio’s manager……<\/p>\n

There is a whole laundry list of reasons not to use CAPM, beta, and alpha but here are some highlights…<\/p>\n