Concept of alpha beta in risk analysis of a security.

• Alpha: This is a risk ratio through which an investor calculate,predict and compare returns. By prediction i mean we can calculate the future date return which can be possibly earned by investing on that security. But this is just a prediction , actual value may vary from it.
  

For calculating alpha: α = Rp – [Rf + (Rm – Rf) β]

here Rp= Realized return of portfolio

Rm= Market return

Rf=risk-free rate

Through this one can calculate how much the realized return vary from the actual return it should have earned.

• Beta: It is a relationship of a security in our portfolio with overall market.By calculating beta a trader can determine volatility of a security with respect to overall market.
  

For calculating Beta= covariance(ri,rm)/variance of market



Result of beta gives an exact overview whether the share is performing according to market, under performing or outperforming and accordingly an investor can decide whether to trade in those securities or not.