April 22, 2016: S&P Global Market Intelligence, a division of McGraw Hill Financial (NYSE: MHFI), has announced that Fidelity Investments has selected the US Value Model from its unique Alpha Factor Library to help customers identify or validate attractively priced stocks with strong underlying fundamentals.

Fidelity is now using the alpha factors components of this model to underpin a series of visual metrics on the Stock Snapshot Page of Fidelity.com. Clients have the ability to drill into each metric to reveal the underlying factors giving them in-depth insights on the value and financial health of a company, as well as details on future growth prospects and how well the company is being operated.

Developed by S&P Global Market Intelligence’s Quantamental Research Team using the organisation’s Global Point-in-Time database, the Alpha Factor Library facilitates the construction of investment strategies and the identification of potential investments for eight key investment styles including Value, Growth, Price Momentum and Quality. At a glance, Fidelity customers can now view how a company compares to its sector peers in order to monitor specific securities and evaluate opportunities based on the company’s fundamentals.

“The Alpha Factor Library is widely leveraged by institutional investors to formulate investment strategies, track the performance of investment styles and research industry-specific signals and trends for ideas that can easily be incorporated into their fundamental and quantitative portfolio construction processes,” said Dave Pope, Managing Director of Quantamental Research at S&P Global Market Intelligence. “Fidelity is taking advantage of select elements of this unique body of knowledge to deliver cutting edge tools for alpha generation to its retail customers.”

Franklin Gold, senior vice-president of Research and Education at Fidelity, said, “As we constantly strive to bring our customers sophisticated yet user-friendly, cutting-edge tools for building and strengthening their own investment portfolios, we are enthusiastic about adding the Alpha Factor Library to our suite of research tools on Fidelity.com.”

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9th August 2013

There are five main indicators of investment risk that apply to the analysis of bonds, stocks and mutual fund portfolios, Alpha, Beta, R-Squared, Standard Deviation and the Sharpe Ratio. These statistical measures are historical predictors of investment/risk and major components of modern portfolio theory (MPT). The MPT is a standard financial and academic methodology used for assessing the performance of equity, fixed income and mutual fund investments by comparing them to market benchmarks. These risk measurements are intended to help investors determine the risk-reward parameters of their investments.

Alpha

It is a measure of an investment’s performance on a risk adjusted basis. It takes the volatility of a security or bond portfolio and compares its risk adjusted performance to a benchmark index. The excess return of the investment relative to the return of the benchmark index is its Alpha. It is often considered to represent the value that a portfolio manager adds or subtracts from a fund portfolio’s return. A positive Alpha of 1 percent means the fund has outperformed its index by 1 percent. Correspondingly, a negative alpha would indicate an underperformance of 1 percent. It would be beneficial for the investor if the Alpha is positive, as it gives more returns on his investment.

Beta

It is also known as the beta coefficient and a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. It is calculated using regression analysis and it is the tendency of an investment’s return to respond to swings in the market. By market terms, the Beta has one individual and security portfolio values and measured according to how they deviate from the market. A beta of 1.0 indicates that the investment’s price will move in lock step with the market, a value of less than 1.0 indicates the investment will be less volatile than the market and likewise a beta of more than 1.0 indicates the investment’s price will be more volatile than the market. For example, if a fund’s portfolio beta is 1.2, it’s theoretically 20 percent more volatile than the market. Investors willing to take more risk in search of higher returns should look for high beta investments.

R-Squared

This is a statistical measure representing the percentage of a fund portfolio’s or security’s movements that can be explained in a benchmark index. For fixed income securities and their corresponding mutual funds, the benchmark is the U.S. Treasury Bill and likewise with equity funds the benchmark is S&P 500.  The values of R-Square range from 0 to 100.

Standard Deviation

It measures the dispersion of data from its mean. Standard deviation is applied to the average rate of return (ARR) of an investment to measure its volatility. A volatile stock would have a high standard deviation. Standard Deviation on mutual fund tells us how much the return on a fund is deviating from the expected returns based on its historical performance.

Sharpe Ratio

The ratio developed by Nobel laureate William Sharp, measures risk adjusted performance. It is calculated by subtracting the risk free rate of return from the rate of return from an investment and dividing the result by the investment’s standard deviation of its return. It tells investors whether an investment’s returns are due to smart investment decisions or due to excessive risks. This assessment is extremely useful to the investors because even if a security or portfolio can reap higher returns than its peers, it is only a good investment if those higher returns do not come up with additional risk.

These tools are extremely useful to the investors as they tend to focus exclusively on investment return, with little concern for investment risk. These financial parameters to gauge risk and investment returns are available on most of the websites as well as into many investment research reports.

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