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Alpha, Beta, CAPM, Correlation & Volatility adjusted returns in a single scanner

Post in "Knowledge Sharing" Started By PRASHANT SHAH, 14th December 2022

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Alpha, Beta and Volatility Scanner

A new feature has been added to the Smart scanner section of TradePoint Desktop. An Alpha, Beta, and Volatility scanner is available.

It shows various statistical measures of the stocks in the universe. Below is an explanation.

Period: Select the date from which you need to check the Alpha, beta, volatility, net return etc for each instrument. End date is always the current date.

Benchmark (Scrip 2)

A measure against which we can compare the performance of stocks or other securities. Usually, it is the Nifty.

Alpha

In simple words, instruments giving returns better than the benchmark have a high Alpha.

Beta

Beta is a measure of volatility. Statistically, covariance divided by variance is beta. In simple terms, if Beta is greater than 1, then the stock is more volatile than the benchmark. Beta less than 1 shows the stock is less volatile than the benchmark. Using this column, we can easily sort stocks having high or low beta and compare it with Alpha.
High Alpha and Low beta is an ideal scenario. Traders may want to watch for breakouts in high beta stocks.

CAPM (Capital Asset Pricing Model)

CAPM calculates the cost of equity funding and helps in determining the expected rate of return relative to perceived risk.

CAPM = Risk free return + (Beta x Market risk premium)

The goal of the CAPM formula is to evaluate whether the stock is fairly valued when we compare its risk and time value of money to its expected return.

In a nutshell, it is used to compare the expected return of an asset with the systematic risk involved. This is a simple tool that is used to measure expected returns over risks. The higher the CAPM, the better.

You can change the risk-free return in the scanner to calculate the CAPM.

Correlation: Correlation shows how much a stock movement is correlated with the benchmark. A correlation of 1 shows positive correlation, and a correlation of zero shows no correlation between the instruments.

Return

Return column shows the return that the stock has given over the user-defined period.

Volatility

Standard deviation and ATR% are two popular tools to calculate volatility. We calculate the standard deviation by calculating the mean or average of the stock price over the last n periods. Let’s say 20 days. For example, the average price for the last 20 days is 200 points and its standard deviation is 5 points. It means that 66% of the prices for 20 days were within 5 points. 95% of prices were within 10 points (2-standard deviation) and more than 99% of prices were within 15 points (3-standard deviation).

In the scanner, we can calculate the standard deviation for any period for all instruments.

Same way, we can calculate ATR% for each instrumentIn this case, it calculates the average true range (maximum difference between high and low price, high and previous close, and low and previous close) for the mentioned period and converts it into percentage numbers for easier comparison.

Net Return (R-V)

Net return is calculated by subtracting the return of the stock from its volatility. Assuming that stock A provides 10 percent returns with 5% volatility, the net return would be 5%. If stock B gives 15% returns with 12% volatility, the net return would be 3%. Stocks giving better returns over volatility can be sorted using this column.

Performance (Net Return)

Performance of stock compared to benchmark for Net return is shown in the performance column. It indicates whether the stock is producing better returns over volatility than the benchmark.

Scanner

I ran the scanner for Nifty 50 stocks with Nifty as the benchmark for last one month. The date selected is 14th Nov 2022. Sorted the stocks by performance.

Below are the top 5 stocks in the universe.

Performance column explains return over volatility in comparison to benchmark. We can also check the Beta and CAPM of the stocks in the universe.

With this scanner, you can check Alpha, Beta, Standard deviation, CAPM, Net return and Net return Performance against benchmark for all stocks in the universe at a single click.

 

 

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