How are Alpha/Beta rankings calculated?

Jensen’s Alpha is a risk-adjusted view of a user’s portfolio. At StockTrak, we include Jensen’s Alpha as a potential ranking type for each session.

To calculate a portfolio’s Alpha, we first calculate the Beta of the portfolio itself. Many other calculations will use the weighted Beta of each stock in a portfolio, but because users buy/sell shares constantly (and we do not necessarily know the beta for many international securities that may be part of a portfolio), we calculate Beta of the portfolio itself. The formula we use for Beta is:

Beta = (Covariance of the Daily Percentage Return of the portfolio and Daily Percentage Change of a benchmark index) / (Variance of the Daily Percent Change of the benchmark index)

Then we use the Beta to calculate the portfolio’s Alpha:

Alpha = (Average Daily Percentage Returns) – ((Risk-Free Rate / 252) + ((Beta) * ((Average Daily Percentage Returns) – (Average Daily Percentage Change of a benchmark index)))

Notes:

• We exclude weekends from the Daily Percentage Returns (both of the portfolio and benchmark index)
• The benchmark index may be different for different sessions (depending on the settings chosen by the administrator during set-up), but by default it is based on the SPY ETF (a proxy for the S&P 500)
• The Risk-Free rate can also be different per session, but we use 3% by default. You can confirm the risk-free rate for your portfolio on the Portfolio Summary page.