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Alpha/Jensen index of a Security

by QuantShare, 1839 days ago
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Here is a trading indicator to calculate the Jensen index or alpha of a particular security. When evaluating the return of a security or a fund, it is important to take into account the risk. The alpha indicator helps you achieve this by measuring risk premiums in terms of beta. Although, Alpha is mainly used to evaluate portfolio returns (diversified portfolios), you can still use it to assess some securities and ETFs.

A positive alpha of 5 tells us that the stock or fund has outperformed its benchmark by 5 percent. It also tells us that the security is more volatile than the market or benchmark index.
A negative alpha of -5 tells us that the stock or fund has underperformed its benchmark by 5 percent. In this case, the security is less volatile than the market.

Example of usage:
- Display the alpha of a stock on a chart
- The benchmark here is the S&P 500 Index
- The risk free rate is 5% (You can use a time series instead of a fixed value)
- The period is 250 (about one year)
- Formula:

a = alpha(close, GetSeries("^GSPC", close), 5, 250);
plot(a, "");

Note: The Alpha or Jensen index indicator requires the Covariance function. Please download this function before using the Alpha indicator.


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Type: Trading Indicator

Object ID: 1349


Country:
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Market: All

Style:
Technical Analysis

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