The Workshop · lesson 6
How much of that return was the stock's, and how much was the tide.
A stock went up 35% last year. Was that good? You cannot know from the number. If the market rose 25% and the stock moves 1.2× the market, the tide accounts for 30 of those 35 points and the stock earned five on its own. If the market fell 10%, the same 35% is a triumph. Put any year in:
Beta is how much of the market's move a stock carries — 1.0 moves with it, 2.0 twice as far, 0.5 half. It is measured, not assumed: plot the stock's moves against the market's and fit a line; the slope is beta. Alpha is what the line does not explain — the stock's own return, the part you could only have earned by owning this stock rather than the market. Fit one yourself:
Two things to notice. First, the fitted beta lands within a tenth or two of the true one on most draws — the tide is easy to measure, because it is in every month. Second, the fitted alpha is all over the place: eight percent a year of real edge, with ordinary stock noise, is fitted at anything from zero to seventeen across draws of five years. Alpha is small, noisy, and the only thing worth paying for. That is why serious desks measure it over many names and many trades rather than admiring one stock's year.
Fact. The index's own years since 2019 ran from −22% to +25%. A portfolio with a beta of 1.0 is those years, whatever names are in it; a portfolio with a beta of 0.4 carries 40% of each of them. The desk's replayed book has a beta of about 0.42: in a +20% index year it owes roughly eight points to the tide, and the rest — most of it — is the names.
This is the A and the C in Abacus. Every name's move is split into the market's part and its own before it is scored; the 0–100 Alpha score is the remainder ranked against the whole desk, so a stock that rose 5% on a day the market rose 6% scores below 50. That is also why the desk hedges: a weak name shorted against its sector fund is a bet on the remainder, with the tide removed on purpose. When you read any performance — a fund's, a friend's, your own — ask for its beta first. Then you know how much of it was the weather.
Keep this: return = beta × the market + alpha. Beta is free and easy to get; alpha is what you are actually looking for, and it is small.
The Workshop is education, not advice. Replayed numbers are averages over many trades, after average trading costs (2 bps a side on a stock, 1 on a fund, included for fairness; yours vary by broker and liquidity) unless stated, and are not forecasts; the live record is on the engine page. Open the deskManualThe EngineChangelog