Beta measures the volatility of a security relative to something else,
usually a benchmark index like S&P. To calculate beta, you scatter
plot the bar to bar changes of the symbol (stock or fund) along with
the bar to bar changes of an index on an XY graph (with the index
going on the X axis) for a user-specified period. A best fit
(regression) line is then drawn through these points. The slope of
that line is beta, while the Y intercept is alpha.
A beta that is greater than one means that the fund or stock is more
volatile than the benchmark index over the given period, while a beta
of less than one means that the security is less volatile than the
index. A beta of 0.9 should be interpreted as follows: the stock/fund
would return only 9% while the market/index went up 10%, however, it
would it would lose only 9% while the market/index dropped 10%.
Similarly, a beta of 1.5 would be interpreted as follows: the
stock/fund would return 15% while the market/index went up only 10%,
however, it would it lose 15% while the market/index dropped only 10%.
Alpha is a measure of residual risk of an investment relative to some
market index. Alpha is the Y intercept of the best fit line mentioned
above. Alpha is expected to be equal to risk-free rate times (1 -
beta). The following equations explains the relationship between
alpha, beta, and the Stock and Index returns.
StockReturn = Alpha + Beta * IndexReturn
The preference windows for both
Alpha and Beta are essentially identical. Both ask the user to specify
the underlying symbol (generally an index like S&P), a price, a
period, and drawing style. Again, the underlying symbol should
generally be an index such as S&P, and that symbol should have data
for the same period that is being studied. The price should generally
be "close", but the user may choose to use something like that
High/Low average. Commonly, beta and alpha are calculated over 3 or 5
year periods of monthly data. This would require a period of 36 or 60,
and a periodicity of monthly.