Stocks Alpha Beta
Stocks Alpha Beta
The Benefits of Financial Planning School
Attending Financial Planning School can provide you with the necessary training and insight that is needed to be a successful investment professional. Competition for jobs in the financial services field is extremely competitive.
Enrolling in a financial services course or degree program can help you meet the high employment standards of the industry. The education provided will introduce you to fundamental understandings of industry best practices, such as comprehending widely used measurements of risk-adjusted returns.
Jensen’s Alpha, also known as Jensen coefficient, or simply alpha, evaluates a portfolio’s actual return compared to expected return, given its systematic risk and the CAPM. Any positive number is good; the greater the positive number, the better. It should be noted a positive number may be the result of security selection, low expenses and/or market timing. Security selection may be due to management skill or simply luck (source: Jensen, 1968).
The Treynor Index, also known as Treynor ratio, relates a portfolio’s return to its risk. The measurement assumes portfolios are well diversified. The Treynor Index (or ratio) is calculated by taking the risk-free rate of return (usually T-bill rate) and subtracting it from the portfolio’s mean return; the resulting number is then divided by the portfolio’s beta. As you can see from the formula, the risk component is systematic risk (source: Treynor, 1965).
The Sharpe Index, also known as the Sharpe ratio, describes portfolio returns based on standard deviation. Specifically, the risk-free rate of return is subtracted from the fund’s return; the resulting number is divided by the portfolio’s standard deviation.
Of the three widely used measurements of risk-adjusted returns (Jensen, Treynor and Sharpe), only Jensen Alpha calculates how a portfolio’s returns compare to its market index. When the risk-free rate of return is low, it becomes easier for a mutual fund (or any portfolio) to have comparatively superior returns when the Sharpe or Treynor index is used.
Financial planning school can provide the foundation you need to understand advanced investment tactics. A financial services course can provide an academic approach combined with a practical focus. The following case study is an example of what you may encounter in your studies.
Some in the academic community feel there is a place for both active and passive management in a portfolio. Investing in large cap domestic stock funds favors indexing while active management favors small cap funds. Indexing is the preferred choice for foreign stocks of developed countries, active management is best for emerging markets or specific regions (source: Dziubinski, 1998 and DiTeresa 1999). Despite these conclusions, results of these two studies are quite varied, as reflected below (note: time periods for each study were slightly different).
When Active Outperforms Passive Management [two studies]
Category Active (Dziubinksi) Active (DiTeresa)
Large Cap Growth 2% 6%
Large Cap Blend 0% 4%
Large Cap Value 31% 17%
Mid Cap Growth 33% n/a
Mid Cap Blend 47% 30%
Mid Cap Value 53% n/a
Small Cap Growth 47% 91%
Small Cap Blend 100% 54%
Small Cap Value 53% 81%
In conclusion, attending financial planning school can provide you with a vast array of knowledge needed to secure a coveted position in the financial services industry. It will also create a solid foundation for you to lean on as you pursue a successful career as an investment professional.
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