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Alpha: performance indicator

Alpha indicator represents the distinction between a mutual fund's actual performance and the expected performance based on the risk level taken by the fund's manager. The Alpha indicator measures the residual risk, which an investor uses afterwards as a result of investing in a fund instead of in a market index. The fund is considered to have an Alpha of zero if a fund produced the expected return for the level of supposed risk.

Alpha = [ (sum of y) - {b * (sum of x)} / n ]:

n - number of observations
b - Beta of the fund
x - rate of return for the benchmark index (often, but not always, the S&P 500)
y - rate of return for the fund

A negative Alpha demonstrates that the manager did not succeed in rewarding investors sufficiently for the risks they take. A positive Alpha demonstrates a return bigger than it was supposed for the taken level of risk. Overall, the Alpha-Beta Trend Channel study uses the standard deviation of price variation to build two trend lines. One is higher and one is lower than the changing average price field. This creates a channel, or a band, where the biggest part of price field values is happening.

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